Many entrepreneurs invest all of their time, energy and money into starting new business. While this “all in” approach is usually necessary in order to ensure the success of the company, it can also wreak havoc on your personal finances.
Most small business owners obtain the financing for their start-up through loans, personal guarantees and credit card debt. You may even be considering taking out a loan from your 401k or other type of retirement account. However, before you take such an extreme measure, you should confer with a debt relief attorney to consider all of your available options.
If your business has been legally incorporated as an LLC, LLP, corporation or some other type of legal entity, you can file a personal bankruptcy that does not include the business. The business can file its own separate bankruptcy if needed as well. In your Chapter 7 or Chapter 13 bankruptcy, you can eliminate business-related debts.
To file a Chapter 7 case, you must be able to pass the means test, which ensures that you do not have adequate income or funds to repay your creditors and that you are not abusing the bankruptcy process. However, if the majority of your debts are related to your business, you may be allowed to file the Chapter 7 without having to pass the means test. During the Chapter 7 process, you may be allowed to eliminate a significant amount of your business-related debt such as personal guarantees and credit card debt.
It should be noted that filing a Chapter 7 to eliminate business debt does not come without risks. Your ownership interest in the business is considered an asset of your bankruptcy estate. Thus, if the business is profitable, your personal filing could place it in jeopardy. In most cases, however, the business is failing and your personal finances are suffering, so the filing makes sense. It is imperative to confer with an experienced bankruptcy attorney to discuss your individual circumstances before filing a case.
To file a Chapter 13 case, you must have a regular source of income. You can restructure your debt (including your business-related debt) under a Chapter 13 repayment plan, which sets forth how you intend to repay your creditors, wholly or partially, over a period of three to five years. Once your plan is approved by the court, you will make one monthly payment to the trustee who will distribute payments to your creditors according to the terms of your plan.
If your entity is a limited liability company or a corporation, it cannot file a Chapter 13. Additionally, there are certain limits on the amount of debt you can include in a Chapter 13 filing. Lastly, the co-debtor stay does not apply to business debts. Thus, your business will remain liable for any joint debts if it is a separate legal entity.
If you are drowning in your business-related debt and you are interested in learning more about filing a personal bankruptcy, let us help. We can answer your questions and help you understand all of your available debt relief options.
If you are interested in learning how filing a bankruptcy case can benefit you, contact Levitt & Slafkes, P.C., at 973-323-2953. You can also reach us by filling out our online form. We represent debtors in Chapter 7, Chapter 13 and Chapter 11 filings. Let us help you get the fresh financial start you need today.