Small Business Debts and Chapter 7 Bankruptcy

The bankruptcy code provides for large business debt relief with Chapter 11 bankruptcy. When Westinghouse, or the Penguins, or Donald Trump, filed for bankruptcy, it was a Chapter 11 bankruptcy. This is a very expensive and very complicated bankruptcy that allows for the restructuring of debts and/or liquidation of assets. With smaller businesses, Chapter 11 is unnecessary, and a normal consumer Chapter 7 bankruptcy can be filed instead.

Chapter 7 bankruptcy is normally filed on consumer debt (such as credit cards, medical bills, mortgages, and car payments). However, it can also be used to eliminate business debts that were personally accrued during the operation of the business. This is important because these debts are often quite large, larger than most personal debts. Fortunately, Chapter 7 bankruptcy can be used to eliminate these business debts once you decide to shut down the business.

What types of business debts can be discharged in Chapter 7 bankruptcy? Almost all types related to a small business. The most important type of debt is the remaining time on a business lease. Landlords can go after the entire remaining lease once you stop paying, and considering that commercial leases are normally for multiple years and tens-of-thousands of dollars, this can be quite significant. In most small business cases, the debtor is personally obligated on the lease, which allows the landlord to sue both the company and individual. Given the large amounts of money at stake with these leases, Chapter 7 bankruptcy may almost be a necessity. The lease can be eliminated whether there are 3 months or 3 years remaining, so there is no need to continue the business once you have decide it is best to shut it down.

Business loans and debts personally backed by debtor are also dischargeable. The range of these types of debts is as broad as the range of different types of businesses. It can include (but is not limited to) debts to vendors, service providers, or leased property. Loans used for equipment or products can be wiped out (though the items themselves could be property of the bankruptcy). It can also discharge loans that are part of a lawsuit.

Personal credit cards used in purchases related to the business can also be discharged. Debtors will often use their personal credit cards to keep a business going, often racking up tens-of-thousands of dollars of debt. These debts will be treated the same as business loans, and unless they were used to pay taxes, they will be dischargeable. These can be discharged along with personal credit card debt on consumer purchases.

Business vehicle loans can also be wiped out. A vehicle used in the business, but secured by a loan signed by the debtor can be surrendered and discharged. This is even the case if the vehicle was (or wasn't) used for personal reasons. Of course, the vehicle will need to be returned to the creditor.

One final point about Chapter 7 bankruptcies filed on business debts is that there is no means test. The means test (which looks at the last 6 months of income for a debtor looking to file bankruptcy to determine the type of bankruptcy they can file) does not apply when the debts listed are "primarily business in nature". This will be helpful for filers with higher incomes at the time of filing.

Contact us if your small business is facing large debts and you are considering bankruptcy. The bankruptcy code may allow you to avoid personal obligation and move on with your life. The end of your business doesn't need to be the end of your financial future.