Business Insolvency

Sole Proprietorships and Partnerships

In this type of business structure, the business is not actual separate from the individuals who own the business. This means that business debts are owed by the owners personally. Therefore, to file a bankruptcy to wipe out business debts, we must file a bankruptcy for the individual owners. If you want to shut down a sole proprietorship business but want to avoid filing a personal bankruptcy we can discuss other non-bankruptcy options with you, such as an assignment for the benefit of creditors or negotiating your debts down informally with creditors.

Corporations and LLCs

Corporations and LLC’s are separate entities from the owners (shareholders or members). This means that the company itself can file for bankruptcy without the owners filing personal bankruptcies. Unfortunately, bankruptcy is not as powerful of a tool for wiping out corporate debt as it is for wiping out consumer debt because a Chapter 7 Bankruptcy filing for a corporation does not result in a discharge of debt after the liquidation. Additionally, corporate debts are often personally guaranteed by owners. The owners liability is not wiped out by the company’s bankruptcy.

For this reason, we always consider non-bankruptcy options as well when planning for the shut down of a company. These include an assignment for the benefit of creditors where a private trustee liquidates a company’s assets and pays off as much debt as possible (this option works well when a business has assets with one or two major creditors), or attorney lead negotiations focusing on personally guaranteed debts to make the shut down process as smooth as possible.

Reorganizations

Bankruptcy can be a useful tool for businesses that would like to continue operations but are suffering under a significant debt load. In these cases, the business can file a Chapter 11 bankruptcy where creditors agree to a repayment plan (usually agreeing to a partial repayment) while the owners continue to operate the business. This is an expensive process and is typically only undertaken when the business model has a reasonable chance of success if the company’s existing debt is reduced.