What happens to my Debts when my business fails?

My Business fails, do I need to file bankruptcy too?

How do personal guarantees affect you in bankruptcy?

Personal Guarantees in Business Bankruptcy:

Many clients call me to say they want to shut down their businesses because they are not making any money.
My first question is: Did you personally guarantee any of the business’s debts?

When your business incurred debts, you signed an agreement stating that, if the business failed, you would personally guarantee repayment of those debts. You become a co-signer of the business debts.
Credit card companies could require the owner to sign a personal guarantee.
Landlords require personal guarantees for leases.
Supply Houses – where you open up a credit and charge items for your business.
SBA – Loans that you personally guaranteed. Some SBA (Small Business Administration) agreements do not require a personal guarantee. However, SBA loans vary.
If a partner or co-debtor signed for the business, they are responsible for its debts after it closes.
Sales Tax – is always still due – you cannot walk away from Tax debts, e.g., sales tax, employer taxes, etc.
Bank Loans – the bank wants someone other than the business to be responsible for the debt if the business fails. The bank will review your collateral, credit history, and/or assets.

Can you file bankruptcy with a SBA Loan?

Yes – However, I will need to meet with you to discuss your particular loan, its terms, your assets, and your finances.

Leases in Business Bankruptcy:

If you did not sign a personal guarantee on the lease, you are not liable to pay the rent that exists after you close down your business.
Most landlords require a personal guarantee when a business rents/leases space.
Landlords know businesses can shut down or declare bankruptcy, and they want someone with assets to guarantee the lease.
If you guarantee a lease, you must honor the lease terms and pay the landlord the agreed-upon amount.
If you did not sign a personal bankruptcy, the business can close, and you are not affected.

Chapter 7 Bankruptcy in Business Bankruptcy:

Normally, a business has some assets, even if they are much less than what it can pay.

Many creditors are pursuing the business for payment. You want to end these constant creditor calls and correspondence.

You could just ignore the creditors, but if you want to notify all your creditors at once, you may want to file a business bankruptcy.

The Trustee takes over your case, notifies all creditors, and you are no longer involved. If there are any assets, the Trustee distributes them to creditors

What to consider before you file a Business Bankruptcy?

While the business was insolvent but operational, it may have paid personal obligations, including rent for a personal residence, a personal residence mortgage, and personal car payments.
Clawback in filing for bankruptcy should be a concern when filing for any bankruptcy.

If a business files for bankruptcy, the Trustee will look at personal debts paid out of the business. If these debts were personal debts, the Trustee would evaluate whether they constitute fraudulent transfers, and a clawback would be necessary.

Should I file Chapter 7 Bankruptcy for my business?

Normally, a business has some assets, even if they are much less than what it can pay.
Creditors are pursuing the business debts for payment.
You want to end these constant creditor calls and correspondence.

You could just ignore the creditors, but if you want to notify all your creditors at once, you may want to file a business bankruptcy.
The Trustee takes over your case, notifies all creditors, and you are no longer involved. If there are any assets, the Trustee distributes them to creditors

Should I file for bankruptcy personally if the business fails?

Can I file for bankruptcy after a business fails/closes?

I inform clients that if their business has filed for bankruptcy, they may want to consider filing for bankruptcy themselves if they remain liable for the business’s debts.

Another consideration when your business failed and you consider filing a Chapter 7 Bankruptcy:

While the business was insolvent but operational, it may have paid personal obligations, including rent for a personal residence, a personal residence mortgage, and personal car payments.
If a business files for bankruptcy, the Trustee will consider personal debts paid from the business. If these debts were personal debts, the Trustee would evaluate whether they constitute fraudulent transfers, and a clawback would be necessary.

When your business fails, personal bankruptcy may not be the appropriate course of action.

Again, it comes back to: did you personally guarantee any debts of the business?

Filing for bankruptcy requires careful analysis and consideration, and you should seek expert bankruptcy advice.

Please call me, a New Jersey bankruptcy lawyer, who will review your situation and provide expert advice.

What's the biggest misconception business owners have after a business fails?

Business owners believe they can walk away without liability. I inform them that if your business files for bankruptcy or closes, you are still responsible for the debts if you personally guaranteed the business debts.

1st determine ---

Did I personally guarantee any business debts?

Your answer will determine how to proceed.

Many clients tell me they are unsure. You must look at your original lease, agreements, and credit agreements.
When you start a business, you should always be careful about what agreements or debts you are personally responsible.
Small businesses are struggling to keep afloat. The business did not expect to be unprofitable for any period and expected the first year to be profitable.

If you did not sign any personal guarantees and the business closes, you are not responsible for its debts, and you do not need to file for personal bankruptcy. There is no need to file personal bankruptcy.

If you signed a personal guarantee for your business debts.

Option: Chapter 7 Bankruptcy, you will lose your assets. If you own a home and want to keep it, you should never file a Chapter 7 Bankruptcy unless you do not wish to keep your home (no equity).

Option: Chapter 13 Bankruptcy. If you are responsible for some of the debts of your failed business and have assets, you may also consider Chapter 13 Bankruptcy, under which you pay some or all of those debts over time, or pay only some of them.

You cannot file for Chapter 13 Bankruptcy for your business. Only individuals can file for Chapter 13 Bankruptcy.

You must have other sources of income and personally guarantee business debts. Chapter 13 Bankruptcy might be the right move.

Option: Chapter 11 Bankruptcy is available to small businesses that want to keep operating until they are profitable again.