As a small business owner, even allowing yourself to think about bankruptcy can be nerve-wracking. You’ve likely put blood, sweat, tears and countless hours into launching and running your limited liability company. But for whatever reason, you’re having trouble seeing a future.
While the number of small businesses that file for bankruptcy is low, it does happen. The reasoning can vary from poor sales, to a lawsuit, to the owner’s personal issues. But what effect, if any, might that LLC’s bankruptcy have on the owner’s personal assets?
The short answer? It depends. Here are a few factors:
Chapter 7: Shutting it down
Chapter 7 bankruptcy is essentially a closing down of the LLC. You give the business and its assets to a bankruptcy trustee, who then sells those assets in order to pay the business’ debts. You, as the business owner, have little control over the process.
The trustee will pay off as much of the debts as possible, putting the money toward high-priority creditors first. It’s possible, maybe even likely, that selling the business assets won’t fully cover all the debts the LLC is responsible for. But once the bankruptcy process is over, the creditors generally can no longer try to get more from the business.
The business is gone and so are its debts.
Chapter 11: Reorganizing
Chapter 11 bankruptcy allows a business to reorganize and build its way back up. Unlike chapter 7 bankruptcy, the LLC owner generally maintains control of the business and its assets. The owner submits a reorganization plan to bankruptcy court, essentially a guide to get out of bankruptcy. It includes a debt repayment plan and any significant business moves, such as staffing or real estate changes.
If the court approves this reorganization plan, the business’ previous debts are discharged and the LLC is now obligated to pay back debts based on the reorganization plan. While chapter 11 bankruptcy offers a chance to salvage the business, it can be expensive and time-consuming.
About that personal guarantee
It’s very possible a person starting a business signed a personal guarantee on a loan. This is a guarantee that if the business can’t pay its obligations, the business owner will be personally liable for its debts. If this is the case, it opens the door for creditors to continue seeking repayments from an individual even after the business went through bankruptcy.
If that person can’t pay off the debts, personal bankruptcy might be considered as an option.
Every LLC is different, and every business owner’s situation is different. An attorney can help determine which course of action might be the best fit based on the circumstances.
