Examine the documents that you signed when you obtained the loan or line of credit to determine if you are personally responsible for your debts. If only your signature appears on the contract, it is safe to assume that you are personally liable for payment and that filing for personal bankruptcy will allow you to discharge those debts. Even if you also signed the agreement as president or officer of your corporation and in your individual capacity, you are personally responsible for the debts. Most lenders require you to sign personally in addition to your corporate capacity because most small businesses are not multinational corporations that have been in business for decades and banks will not take the risk and lend money to a start-up mom-and-pop business unless mom and pop sign on the dotted line, sign a personal guaranty, or put up other collateral to satisfy the lender.
If a small business, whether a corporation, an LLC, or an LLP, is experiencing financial difficulties and the proprietors file for personal bankruptcy, the problems are typically resolved if the business has no saleable assets or accounts receivable that a creditor can seize. Typically, the proprietors shut down the business, file for personal bankruptcy, and begin a new life free from creditor harassment. However, if the business owed sales tax or meal tax to the state, the proprietors are typically liable for payment of those obligations, which are typically not eliminated by filing bankruptcy.
In the process of registering for personal or business bankruptcy, there are potential pitfalls that could befall you if you are careless. If you have any accounts receivable or customers who owe money to you or your corporation as of the date you file for bankruptcy, you may lose the right to collect that money because the bankruptcy code requires the """"trustee"""" to collect the money that is legally due, and you may never see that money because it will be used to partially repay your creditors. The trustee is responsible for examining all of your bankruptcy documents and seizing all of your non-exempt property. Keep in mind that in a Chapter 7 bankruptcy filed solely by a corporation, there are no exemptions and the trustee may seize all of the corporation's assets that are not properly secured by a creditor. Before filing for bankruptcy, you and your attorney must conduct a comprehensive evaluation. You are in the best position to know what assets you or your business possess, and your attorney will need to know every detail to represent you or your business effectively. While the majority of corporations file for Chapter 7 bankruptcy, a select few file for Chapter 11 because they intend to continue operating their business and are able to devise an acceptable plan to repay all of their creditors. Chapter 11 cases are extremely complex, and it is best to enter and exit them as rapidly as possible because, historically, the longer a Chapter 11 case remains open, the more problems appear, which can cause problems for the business owner.
After the filing of Chapter 7 bankruptcy for a corporation, the trustee will frequently insist that the business terminate operations. However, in some cases, this is not the case. After your business bankruptcy case has been resolved, you are free to reopen the same business under a different or similar name, but not the same name as the corporation that filed for bankruptcy. Corporations do not receive a discharge from the bankruptcy court; rather, the case is closed after the trustee submits a report of no distribution or abandons any assets the corporation may have because their value is insufficient to justify selling them.
When a business owner files for personal bankruptcy but not corporate bankruptcy, another issue arises. If the individual filing for bankruptcy is also the sole shareholder and proprietor of the corporation, and if the corporation has assets, then those assets may be subject to seizure by the bankruptcy trustee if they are not exempt. This comprises all accounts receivable as of the filing date of the bankruptcy. Nevertheless, if your corporation's liabilities exceed its assets, you could argue that any potential corporate assets must be offset against the corporation's liabilities. Before filing for bankruptcy, it is advisable to consult with an experienced bankruptcy counsel so that your unique circumstances can be evaluated in order to safeguard your hard-earned money.
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