Business debts can be just as stressful as personal debts, if not more so. When a business owner finds that the business is not doing well and the finances have become poor enough to make keeping up with debt payments challenging, it can be difficult to resolve outside of bankruptcy. Whether a company enters into business Chapter 7 or a personal Chapter 7 depends on a few factors.
Personal or Business
Not all businesses can file for business Chapter 7. For example, sole proprietorships must be filed as personal bankruptcy because there is no legal separation between the business and the owner in terms of liability. This is especially the case when business debts are personally guaranteed by the owner at the time of debt accumulation. In other words, any debts that are co-signed, guaranteed or backed by the owner’s personal liability will be required to be repaid or become part of a personal Chapter 7 case. Further, personal assets could be at risk of liquidation in order to satisfy business debts.
Limited Liability Companies (LLC) and corporations are treated differently than sole proprietorships in bankruptcy. Because there is legal separation from the business and the owner, a business bankruptcy may be filed in order to resolve business debts without including the owner’s personal finances in the filing. However, if any of the debts accumulated in the business operations have ties to the owner(s) personal finances or credit accounts the debts may not be easily discharged in a business bankruptcy. Personal assets are generally not at risk for liquidation to satisfy debts in these cases.