What Happens When You Cannot Pay Your Business Loans

Your business is struggling and you cannot pay your debts for a while. Creditors will start asking for their money and will threaten to take you to court. Perhaps the first question that enters your mind is what happens when you cannot pay your business loans? What business debt are you personally liable for and what the bankruptcy options available The amount of money the creditors can take from you will depend on how your business was initially setup, and whether or not your business loan was secured by collateral.  If you decide on bankruptcy, it may also change the amount of money the creditors will get.

Payroll Taxes

You are personally liable for taxes on payroll irrespective of how your business is structured or what type of loan you have.

Sole Proprietors and Partnerships

If you are the sole proprietor, your business and you are the same entity. You are liable for all your business debts. In the case of a partnership all the partners or stakeholders are responsible for the business debts.

Limited Liability Companies and Corporations

Corporations and Limited Liability Companies (LLC) usually do not have the problem of personal liability as sole proprietors and partnerships.You may, however, have unknowingly given up your personal asset protection.  This can happen in many ways but the most common is when the lender refuses to issue the loan unless you make a personal guarantee or statement of personal liability when your business needs to rent a premises.


If your business cannot pay its debts and creditors are hounding you for payments, you may consider the option of bankruptcy.  You need to consider this option very carefully as you may not be sure of what you will have left after bankruptcy. 

Bankruptcy Options

If your business is a sole proprietorship you have the option of filing a Chapter 7 or a Chapter 13 bankruptcy, depending if you meet the criteria for both. Both of these bankruptcy options can be used to satisfy your business and personal debt.

If you are the owner of a Limited Liability Company, a general partner in a partnership or a shareholder in a corporation and somehow waived your limited liability, you are not protected.  You need to file personal bankruptcy to protect yourself.  If you qualify you may file a Chapter 7 bankruptcy. The trustee will sell off your assets in order to satisfy your personal debts as well as those taken on behalf of the business. Your debts may be wiped out by discharging of your bankruptcy.

With a Chapter 13 bankruptcy you need to come up with a repayment plan and submit to the bankruptcy court. You need to show the court how you will be able to pay your business debt over a period of time. 

Pros of Bankruptcy

Once you file for bankruptcy, you have time because the court stops creditors from foreclosing or repossessing your property and usually puts an automatic stay on debt collection.  The bankruptcy can wipe out unsecured debt but secured debt is considered separately.  You put your property in as security and the creditor is entitled to take it even if you file for bankruptcy.

If you want to keep your property you need to file a Chapter 13 bankruptcy if you qualify.  Based on your income, you can come up with a payment plan of how you are going to pay your debt over time.

Filing a Chapter 11 bankruptcy is also an option available if you cannot pay your business loans, however there are strict eligibility requirements.

Our business debt relief lawyers have assisted many businesses with overwhelming debt by creating effective debt relief strategies. If you cannot pay your business loans, there are several debt relief strategies available. Schedule your free initial consultation today.