I frequently get calls from individuals who own small or mid-size businesses that are experiencing financial difficulties and need to close their doors. They often assume that they should file a bankruptcy petition on behalf of the business if it is a separate business entity. Often, filing the petition for the business does no good, and potentially could lead to negative consequences. A Chapter 7 filing for a small business will not relieve the owners or others from personal guaranties or other personal obligations arising from the business. In addition, the filing of any Bankruptcy case is an open invitation for a Chapter 7 Trustee to come in and review and investigate all financial affairs of the company and, in many cases, the actions of the owners. Often the best option for a small business is simply to close the business and notify creditors of the closing, as discussed in this article in the Georgia Bankruptcy Blog.
There are instances in which it may be beneficial to file a Chapter 7 for the business:
- The business has significant assets that need to be liquidated, and owners would rather move on to other opportunities rather then spend several weeks or months dealing with the liquidation process. Retail businesses, or businesses with inventory, office furniture equipment, or other unsecured assets may fall into this category. The business owners may also consider a Chapter 11 liquidation.
- I recently filed a business Chapter 7 in which creditors had obtained judgments and were being very aggressive with post-judgment discovery. Even if the owners filed personal bankruptcy, they still would have a duty to respond to discovery for the business. Again, the hassle factor may lead to a filing.
If the business has saddled the owners with a large amount of personal debt, it is often better to see a Bankruptcy lawyer to see if that can be addressed in a personal case. If your business debt is more than your personal debt, you generally qualify for a personal Chapter 7 under the Means Test regardless of household income. It is important to see a lawyer for an initial consultation as soon as the financial problems get severe. Contact a good Bankruptcy lawyer in your area to set up a meeting with a couple lawyers, or contact us if you are in Georgia.