If your business owes a considerable amount of money that you simply can’t pay back, filing for business bankruptcy may be your best recourse. But putting your business through bankruptcy doesn’t always guarantee protection for your personal assets. Whether your personal finances may be at risk depends on the type of business you operate and several other factors.


If you’re unsure how your business debt might affect you personally, working with a knowledgeable bankruptcy attorney is crucial to ensure you understand your potential risk and all of your options. Keep reading for a basic overview of what you can expect in terms of personal liability when you file for business bankruptcy.


Understanding Your Personal Liability in a Business Bankruptcy Case

If you operate your business as a sole proprietor, your business and personal finances may not be clearly separated, which can put you at risk. Because you and your business are not separate legal entities, you may be personally responsible for all of your business debts.


If you’re in a partnership or own an LLC, your personal finances may also be at risk. If you’ve made personal repayment guarantees to business creditors or pledged personal collateral to secure a business loan, your personal finances could be vulnerable too.


Your Bankruptcy Options as a Business Owner

The type of business you own and the amount of debt you owe will determine which of the following types of bankruptcy you’re eligible to file for:


●        Chapter 11. If you own a large-scale operation, want to continue operating your business, and your debts exceed the limit to file for Chapter 13, you can file for Chapter 11 bankruptcy. Your business must have the cash flow to make the monthly payments required as part of the Chapter 11 repayment plan. Your personal assets won’t be affected, and as long as you adhere to the agreed-upon payment schedule, you’ll keep all of your business property, too.


●        Chapter 13. If you operate a sole proprietorship, you can file for Chapter 13 bankruptcy if you want to keep your business open. However, because Chapter 13 requires you to adhere to a court-agreed, monthly payment plan to pay down your debt, your business must have enough cash flow to make those payments. Chapter 13 can wipe out your personal liability for your business debts, and it also allows you to keep your exempt business property. Your non-exempt business property is protected, too, but you’ll have to pay for the value of that property as part of your repayment plan.


●        Chapter 7. You can file for Chapter 7 bankruptcy as a sole proprietor, LLC, or corporation, but doing so could spell the end of your business. If you’re a sole proprietor, exemptions may be able to protect your business and personal assets, but that’s not always the case. If you’re a corporation, partnership, or LLC, you might need to sell business assets to pay back your creditors.


Potential Problems in Chapter 7 Business Bankruptcy

Corporations and partnerships don’t qualify for a discharge of business debts when a Chapter 7 bankruptcy case concludes. So even when the court discharges the case and the business closes, the business debts still stand.


That’s where personal financial risk can come in.


Although the business may be closed, creditors can collect from any individuals who are personally liable for business debts. In a partnership, partners who have a personal responsibility to pay the business’s bills may find their assets and finances at risk.


Depending on the situation, a bankruptcy trustee may turn to the partners’ personal assets to pay off the creditors in the case. Given the potential risk in this situation, partnerships almost never file for Chapter 7.


A variety of other factors can put business owners’ personal finances at risk in a business bankruptcy case and the specifics aren’t always straightforward. That’s why, if you’re considering business bankruptcy, it’s in your best interest to consult with an experienced bankruptcy attorney who can help you understand your options and risk.


Schedule a Business Bankruptcy Consultation Today

If you own a business in the Twin Cities metro area and are considering filing for bankruptcy, having the insight and experience of a knowledgeable bankruptcy attorney is invaluable. To learn more about your options and potential financial risk, schedule a free consultation today with Ron Lunquist, Attorney at Law. For more information, call our office at 651-454-0007 or fill out our contact form, and we’ll be in touch.