A debtor can combine his or her personal and business debts in one bankruptcy filing if he or she is a sole proprietor. However, if the business is incorporated, the debts owed by the business will not be discharged, even if the sole shareholder files a personal bankruptcy discharging the same debt. Only the individual who filed the case discharges the debt (normally a personal guarantee of the corporation’s obligation).
Normally, a Chapter 7 for a corporation is unnecessary. Small corporations usually just liquidate assets and “die.” If the shareholders don’t want to deal with lawsuits against their corporation, they will often file a Corporate Chapter 7 to avoid having to participate in the suit, including appearances at hearings or depositions. In a Chapter 7 business bankruptcy, there is no formal discharge. There is a liquidation of assets and a formal dissolution or “winding down” of the company.
The benefit to filing a Chapter 7 business bankruptcy is having the bankruptcy trustee liquidate the assets and pay the priority debts (IRS, state department of revenue, employee wages, etc.) first. This should help relieve, but may not completely absolve, the owners, shareholders or officers of whatever personal liabilities they may have regarding those debts. Once again, this is usually something the shareholders can accomplish on their own by liquidating corporate assets and using the proceeds to pay priority creditors.
In most cases, the corporation’s debts are guaranteed by the individual shareholders (seemed like a good idea at the time, huh?), and the shareholders often seek individual relief under Chapter 7 or 13 of the bankruptcy code. However, if a shareholder files for personal bankruptcy, the vendor or supplier that relied on his personal guarantee will likely stop extending credit to the business.
Things can get tricky if the guarantor does not qualify to file a Chapter 7 bankruptcy. If the guarantees, combined with all other debt owed personally by the guarantor exceed the Chapter 13 debt limits ($1.081M secured and $360K unsecured), the guarantor’s only other alternative may be Chapter 11. Given the cost, every option to avoid Chapter 11 should be explored by an experienced bankruptcy lawyer, but if Chapter 11 is the only way out, only an experienced Chapter 11 attorney should file the case.
If you have questions about a personal or business bankruptcy, please contact us at your earliest convenience. Check out our website for more valuable information.
Parker and DuFresne