Can I File A Chapter 7 Bankruptcy For My Small Business Only?

by Kevin Gipson, New Orleans Bankruptcy Attorney

December 1, 2012

The Small Business Entrepreneur:  He employes half of all private sector employees, pays 44 percent of total U.S. private payroll, and has generated 65 percent of net new jobs over the past 17 years.

The Small Business Administration estimates that in the year 2009 552,600 new small businesses opened for business and 660,900 closed, resulting in an annual turnover of about 10 percent.

For small businesses that were owner operated with no additional employees, the turnover rates three times as high as for those with employees.

An entrepreneur is also the eternal optimist, and will often over extend himself to keep his business afloat, and often long after he should have shut down.

Add to the optimism the inability that small businesses face in obtaining loans to fund their operations, and you frequently have individuals who go into debt personally to maintain a failing business.

When a business is in financial trouble its’ bankruptcy options are limited to Chapter 11 and Chapter 7.

However, a Chapter 11 reorganization is very often not a viable option for the small business owner since they are costly.  Also, even for major corporations, such as Circuit City and Linens ’n Things, Chapter 7 liquidation ends up as the only option even when starting in Chapter 11.

Often, when I meet with a small business owner thinking about bankruptcy, they only want to file for the business.

This is a bad idea for a number of reasons:

  • It is unlikely that any business loans that you have taken out are in the business name only.  It is more likely that you personally guaranteed those loans.  As a result, you will still be personally liable for those debts even if they are discharged for your business.
  • With many business related tax debts, such as sales taxes and payroll taxes, you are holding these taxes in trust for the taxing authority, making you personally liable for those debts.  (For an article on dischargeability of tax debts in a bankruptcy, see the article, Does Bankruptcy Clear IRS Tax Debt, by BLN Contributor, Kent Anderson).
  • Many individuals do not take the time to maintain the formalities necessary to shield themselves from personal liability.  Using business funds for personal use, or vice versa, failing to have annual board meetings for a corporation/ failing to get corporation resolutions for purchases, and using personal credit for business purposes, can all result in lawsuits against you individually under State law theories.  Two common legal theories are known as “piercing the corporate veil” and “alter ego“.  Under either theory, even if you have set up a corporation or other business entity to avoid personal liability, you may still be sued and have a judgment rendered against you personally.

Lastly, you probably have personal debt that it wouldn’t hurt to get rid of while discharging your business debt.

If you are considering a bankruptcy for your business only, listen to your attorney when he advises that you include your personal debt.

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I've been a consumer bankruptcy lawyer for nearly 25 years. Since that time I have helped many people resolve their financial problems. I have been practicing law since 1986 and I am licensed to practice in all state and federal courts in the State of Louisiana. Because I am a sole practitioner, you know that your debt matters are being handled by me personally. In addition to my work with consumers, I am also frequently asked to speak at local seminars on bankruptcy law. I am member of the following organizations: • Louisiana Bar Association • National Association of Consumer Bankruptcy Attorneys • Bankruptcy Law Network My office is located at: 3920 General DeGaulle Drive, New Orleans, LA 70114 Telephone: (504) 368-4101

Last modified: April 21, 2013