We frequently get calls from people asking whether we handle “business bankruptcies.” The short answer is: not really — at least not in the way most callers are imagining.
Technically, our firm focuses on consumer bankruptcy. We do not handle Chapter 11 or Subchapter V cases, and it would be extremely rare for us to file a corporate Chapter 7. But the more important issue is this: when people call about a “business bankruptcy,” they’re often operating under the assumption that they can file bankruptcy for the business, shut the doors, and walk away from the debt personally.
In most cases, that’s simply not how it works.
Almost all small-business debt is personally guaranteed. Even if your business is set up as an LLC or an S-Corporation, lenders, landlords, credit card companies, and equipment financiers typically require the owner to sign a personal guarantee. That means if the business cannot pay, you are still legally responsible. And when there’s personal liability, the solution is usually a personal bankruptcy, not a business-only filing.
Consumer bankruptcies are about three core concepts:
1. Obtaining a discharge of qualifying debts
2. Protecting assets through exemption laws
3. Liquidating and turning over any non-exempt assets (and minimizing that wherever possible)
Corporate Chapter 7 bankruptcies, by contrast, are only about liquidation. Corporations do not receive a discharge, and there are no exemptions. The business simply liquidates what it owns and then ceases to exist. That process does nothing to eliminate personally guaranteed debt, in fact it really doesn’t accomplish much of anything unless there are substantial assets and an orderly method of paying corporate creditors is desired. But it also creates issues of preferences, which a corporate trustee can try to recover from the owners in certain circumstances.
If a business has already failed and is shut down, my job often becomes much more straightforward: helping clean up the personally guaranteed debt through a personal Chapter 7 or Chapter 13.
If the business is still operating and could be viable without the crushing debt load, things become more complicated. That is where Chapter 11 or Subchapter V may come into play—cases that routinely cost tens of thousands of dollars in legal fees. For businesses with substantial revenue and debt, those options can make sense, and we can refer you to firms that handle that type of work.
Sometimes we also discuss what’s known as a “corporate flip” — allowing the old entity to go defunct and starting a new company. This approach is usually for a small, one person operations, yet has risks. Assets don’t just mean equipment or inventory; they can include customer lists, websites, phone numbers, contracts, and goodwill. In certain situations, creditors may argue that these assets were improperly transferred. Whether this strategy is viable depends heavily on the facts and the creditor landscape – are the creditors banks without feelings, or suppliers or landlords with an axe to grind?
The bottom line: if your business is struggling, the right question is usually not, “Can I file bankruptcy for my business?” but rather, “What is the best way to deal with the debt I personally guaranteed?”
That’s where a consumer bankruptcy analysis often provides the clearest—and most affordable—path forward.