Business bankruptcy: whose debt is it?
By Cathy Moran, California Bankruptcy Lawyer on Aug 21, 2009 in Bankruptcy Practice and Procedure
Small business owners feel as though they and their business are one. Before a bankruptcy filing, we have to separate the business from those who operate the business to determine who needs to file.
This is most dramatic when the business is a separate legal entity, a corporation or an LLC. These entities are their own legal “persons” who can incur their own debt. Generally, the owners of one of these entities are not automatically liable for the entity’s debts.
So, if the debt is in the name of the entity and the owners haven’t guaranteed the debt in writing, the entity’s debts don’t impact the owners.
In an era of high limit credit cards and little bank lending for small business, it’s usually the reverse pattern that I see: the entity may be liable for very little debt because the owners have financed business operations with the owners’ credit cards.
My clients often assume that the “business credit card” is a debt of the entity, because the business name is embossed on the card. Not necessarily. The entity is liable only if it signed the credit agreement. We find that the business name is only there to make the card holder feel ” businesslike.”
When the debt is the responsibility of the owners, we can often file a bankruptcy case for the owners and the entity business goes right on operating, now freed from servicing the credit card debt of the owners. Many small businesses can survive as a result, while the owners get a fresh start.
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