Can I Discharge Business Loans in a Bankruptcy?

store closing

Knowing that a large percentage of your personal debts can be discharged or forgiven by filing for bankruptcy, many business owners  wonder if the same would be true for loans they took out to start a small business.

Unfortunately, nearly all loans taken out by any small business will have been guaranteed by the owner(s) of the business. Lenders do not typically grant loans to new small businesses without the personal guarantee of the company’s owner(s). Therefore, even if you do file for bankruptcy for the loans you took in order to get your business off the ground, you will still be held personally responsible for the repayment of the debt(s). Because of this, filing for small business bankruptcy in order to recoup your initial business loans will not be very effective.

Another faulty belief held by many new business owners is that an incorporated business will mean protection for the owner(s) if the business fails. The reason why this belief is faulty is because, as previously mentioned, most small business owners are required to guarantee any loans they take out for their start-up. Anyone who has personally guaranteed the loan(s) s/he took in order to specifically start their business will not find any protection in incorporation.

Filing for bankruptcy for a failing business usually does not offer a whole lot of help to the business itself. Bankruptcy discharges aren’t even granted for businesses that are closing their doors. Therefore, if your business just isn’t going to make it, don’t waste your time filing bankruptcy paperwork for the business itself. YOU are the person/entity who will need protection, so you should consider filing a personal bankruptcy and attempting to discharge debts related to your business. These kind of debts can typically be discharged in an individual bankruptcy matter.

On the other hand, if you think that your business is going to survive and (at some point in the future) thrive, but you are just having some temporary trouble keeping it afloat, a business bankruptcy may help protect it from going under. It should be noted here, though, that most small business that file for bankruptcy do not make it through to the other side with their doors still open.

Filing for bankruptcy for your small business can give you time to reorganize your business finances and debts. As a business owner who would be able to stay in business with a reconfigured budget and restructured debts, there are two bankruptcy options. Both Chapter 11 and Chapter 13 bankruptcies allow businesses to stay open by organizing a more realistic financial plan for the business owner(s).

Both Chapter 11 and 13 bankruptcies offer you the ability to maintain ownership of any business properties. In order to do so, you’ll be required to sell any unnecessary assets for profit, to help you pay down your existing debts. Additionally, your secured business debts will be modified to make the payments more realistic for your budget.

Where possible, it is advised to file for Chapter 13 bankruptcy if you are the sole owner of your business and if you meet the debt limitations required under Chapter 13 bankruptcy law. It is a less expensive and usually much faster option to file Chapter 13 instead of Chapter 11. However, if you do not meet the eligibility requirements for Chapter 13, you can file under Chapter 11. No debt or income requirements/limits exist regarding filing for Chapter 11 bankruptcy, but as mentioned, it can be expensive and time consuming.

You can learn detailed information about your particular bankruptcy needs by working with a NJ bankruptcy lawyer near you. Each case is unique, and your attorney will review all specifications relating to your business and debts in order to best advise you about your options.

Image credit: Bradley Gordon

One Response to Can I Discharge Business Loans in a Bankruptcy?

  1. Pingback: Can I Ever Recover Money Lost in a Personal Loan? | Veitengruber Law

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