Business Debt: Erase Your Personal Liability With a Chapter 7 Bankruptcy

Business Debt: Erase Your Personal Liability With a Chapter 7 Bankruptcy

Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC


You may be surprised to discover that if your small business is swimming in debt, you may be able to rid yourself of personal liability for those debts.

Here’s what you need to know:

Small businesses are usually the first companies to go broke when the economy takes a downturn. And the “slump” that we’ve been in since 2008 has cost many business owners their only source of income.

Here are situations business owners often find themselves in:

1. Your business debts have now reached the point where you’ll never have enough money to pay them off.
2. Your business commitments – like a costly lease for commercial space, vehicles or equipment – keep you from operating in the black.
3. Creditors and collection agencies harass your employees and you.
4. One of your vendors got a judgment against your business and you have no way to pay it off.
5. You need to shed some business debt so you can pay your mortgage, your car loan, or other business debts.
6. You need to block a lender from repossessing your car, garnishing your spouse’s paycheck, or foreclosing on your home.
7. A vendor has a lien against your home and you want to escape from your mortgage and not be on the hook for any deficiency.

Here’s how a chapter 7 personal bankruptcy can help:

A Chapter 7 personal bankruptcy eliminates debts that are your personal responsibility.
If you are the sole owner of your business or if you are in a general partnership, then you are personally liable for your company’s debts. This means you can erase your obligations in a Chapter 7 personal bankruptcy. If your business is a legal entity all its own, such as a corporation or limited liability company (LLC), then you are personally responsible for those debts only if the lender had you sign a statement of personal responsibility or a personal guarantee. But without your personal guarantee, the corporation or LLC must pay its own obligations and must file a business bankruptcy to erase its debts.

The bankruptcy court may require that you close your business, at least temporarily, if you file a Chapter 7 personal bankruptcy.
If your business is swimming in debt, you may already want to close your doors, so this is not a key consideration. If yours is a service business, with few tangible assets, the court may allow you to remain open during your Chapter 7 filing. What many business owners do is shut down their business, go through a Chapter 7 bankruptcy to erase their personal debts, and then form a similar business at a later date. If you want to stay in business, and if you have sizable business assets, which will probably be sold during a Chapter 7 bankruptcy, then you should consider other options. For example, you might consider a Chapter 13 bankruptcy (repayment plan), as well as negotiating with creditors for more favorable payment terms.

The framers of the U.S. Constitution recognized that both people and businesses sometimes get overextended. This may be due to a poor economy, poor decisions, or any number of other reasons. As a result, they built into the Constitution the opportunity for bankruptcy so you can wipe your slate clean and get a fresh start.

So don’t consider bankruptcy as a personal failure. Instead, see it as the opportunity to start again. And with the experience of going through a bankruptcy, you’ll likely make different decisions the next time you start a business – and this time you’ll enjoy financial success. If you think that filing for Chapter 7 bankruptcy may be the answer to your money problems, speak to a qualified lawyer who specializes in bankruptcy to find out more.