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Business Bankruptcy

Can You Discharge Debt from Your Business with a Business Bankruptcy?

Business owners take on a lot of risk to make their businesses work. Many entrepreneurs take on debt to launch their businesses. There are many different types of debt you can use to start a business. Some investors will invest in an opportunity with no guarantee that they will have their money returned, but simply as a gamble on capitalizing on their investment. This isn’t really considered a debt when there is no agreement to be repaid. This is more like buying stock in a company. If the stock rises, you win, but if the stock loses value, the investor’s money is gone and no return is expected. On the other hand, a loan to a business that has an agreement to return money is considered a debt. In this situation, a private party or bank loans a business or an individual some money to help fund a business. There is an agreement to return the money plus interest within a time frame either in lump sum or in payments. The issuer of the loan makes money through interest payments. If the business fails and the debt cannot be repaid, the business owner or the business itself will be in default of the loan if the loan is not paid on time.

Who Files Bankruptcy, The Business or The Owner?

Does the owner need to file a bankruptcy in order to be relieved of this debt? Can the business itself file a bankruptcy as an entity to discharge the loan debt? It all depends on how the debt was issued. If the loan was personally guaranteed by the owner of the business, the owner is responsible for the debt. This means that whether is operating or not, the owner is still on the hook for the debt. The owner could shut the business down if it is unsuccessful, but since the owner personally guaranteed the repayment of the debt in the loan agreement, he or she needs to repay it. In this case, the owner can file a bankruptcy to discharge the debt from the loan. The owner would need to file a personal Chapter 7 or Chapter 13 to get relief from the debt. Even though the business failed, the owner needs to be able to qualify for bankruptcy in order to get the debt discharged. The danger here is that the owner’s personal assets are at stake because the owner personally guaranteed the debt. If the business failed but the owner still has money, the debt collector is going to go after the owner’s personal money, but if the owner qualifies for a bankruptcy, the debt can get discharged in the bankruptcy.

If the loan was never guaranteed personally and was issued as solely a business loan, the business can file a bankruptcy and technically get the debt discharged in a business bankruptcy. The loan must have been issued only to the business for this to work meaning that the owner’s name is no where in the terms of the loan outside of being a signer and representative of the business. In this case, a Chapter 7 or Chapter 13 for the business could provide relief from the debt. If the business has no assets, the loan can get completely discharged, but if the business does have assets, the lender can make a claim and try to recover some of the value of the assets.

There is still some risk to the owner even if the loan was only made to the business. The lender can file a lawsuit against the owner and get a judgment against them to make the debt a personal debt if they feel like they have a good case in court to prove that the owner used the loan for their own personal purposes. They can try to claim in court that, since the owner is the operator of the business, the owner is also responsible for the debt. It would be left up to the judge to decide whether the owner will be personally liable for the debt or not.

Warning! This Is Not Legal Advice!

The information above should not be used as legal advice! We are simply illustrating possible situations that may help you get an idea of how a bankruptcy could possibly help with business debt, but we are in no way providing advice that could give you instruction on how to handle your specific situation. Real life situations are riddled with specifics that could completely change outcomes of these types of scenarios. The best thing to do is to contact us to get a free consultation with our attorney about your situation to make sure that we can apply a bankruptcy solution for you or your business.

Contact Bankruptcy Law Professionals at 855 257-7671 to speak directly with our attorney.

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