Can I Include My Business in Chapter 7 Bankruptcy Filing?

08-May-2010 Most likely, yes. While it depends on the way your business is structured (sole proprietorship, LLC, etc.), most small business debts can be covered by a chapter 7 bankruptcy filing. Here’s why:

When Business is Personal: If you are a sole proprietor, there is very little differentiation between you as in individual and you as a business owner when it comes to creditors and the law. You are personally liable for all business debt incurred. Ditto if you are a partner in a general partnership.

If you are a shareholder or member of an LLC (limited liability corporation), your liability is based on whether or not you have waived your liability protection by signing a personal guarantee. The majority of small business owners, even those who have set up their company as an LLC, have signed a personal guarantee which allows their creditors to come after their personal assets to collect on business debts.

Including Business in Chapter 7 Bankruptcy: Your bankruptcy and small business debts are interrelated. If there is no difference between your personal and business debts, they will be combined in Chapter 7 bankruptcy. Simply put, all your assets will be sold and the proceeds will be used to pay off your creditors. Secured creditors (lien holders on mortgages, auto loans, etc.) will be paid off first, and unsecured creditors will be paid afterward. Most likely, there will be little left to pay unsecured creditors and those eligible debts will be discharged. In some cases, the only option for a failed business is chapter 7 bankruptcy filing.

The Exception to the Rule: There are some debts that are impossible to discharge, even through business chapter 7 bankruptcy filing. Most likely, you will still be responsible for payroll taxes. Because the IRS is a tough creditor, you can not just ignore them and hope they’ll go away. However, with the help of a qualified legal professional, you may be able to negotiate with the IRS to get on a payment plan or get them to settle for less than the amount owed.

For a lot of small business owners, their business is so closely linked to their personal assets that its failure can lead to bankruptcy from the small business. Luckily, it is possible to include your business in chapter 7 bankruptcy and get debt relief. To find out more about business and chapter 7 bankruptcy, contact a qualified legal professional for advice.

Chang and Carlin
The content found on the Chang & Carlin site is not legal advice and is purely for informational purposes. The information contained herein is not a substitute for the advice of an attorney and does not create an attorney-client relationship. If you are interested in obtaining information about chapter 7 bankruptcy, chapter 13 bankruptcy, foreclosure services, real estate legal services, you are encouraged to call our law firm at 866-790-8601 or Request a Free Legal Evaluation. Chang and Carlin serves clients in Chicago, Schaumburg, Joliet, Warrenville, Waukegan, Illinois.

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