When a business has been operating in the red for too long, sometimes the owners turn to bankruptcy as a means of getting their finances in order or figuring out a way of coping with business debts. It can also be a way to stop creditors from chasing the business for money or threatening legal action against you or your company. 

If you’re in a situation like this and are considering a bankruptcy filing, it’s important to keep in mind that there are some types of business debts you can’t get rid of through bankruptcy. Let’s take a closer look at what bankruptcy will allow you to do when it comes to altering how much a creditor can obtain.

How Can Bankruptcy Help Your Business?

If your small business is struggling, you’re not alone. Most new small businesses don’t survive, with studies indicating that only about one-fifth of new small businesses manage to keep operating for more than one year. For many of them, bankruptcy is designed to help the business eliminate or repay its debt under the guidance of the bankruptcy court. Business bankruptcies usually fall into two categories: liquidations or reorganizations.

If you’re the sole proprietor of your business, you’re responsible for all assets and liabilities. Most sole proprietorships file for Chapter 13, a reorganization bankruptcy. While Chapter 13 is typically used by individuals, it can also be employed by sole proprietorships and small businesses if the owner’s goal is a reorganization rather than liquidation. You would establish a repayment plan with the bankruptcy court demonstrating how you plan to repay your debts.

Business partnerships or corporations, or business entities that are separate from their owners, often file for bankruptcy protection under Chapter 7 or Chapter 11. If it seems unlikely your business will survive, Chapter 7 bankruptcy is a viable choice as a liquidation when restructuring your debts is no longer feasible. Chapter 7 is also a good option when the business no longer has any substantial assets. For a Chapter 7 bankruptcy, the applicant takes a “means test.” If their income is above a certain level, the application is rejected. But if your Chapter 7 bankruptcy is approved, the business will be dissolved.

Chapter 11 is a business reorganization, often chosen by owners who feel they can turn things around and earn a profit again. Under Chapter 11, a company reorganizes and stays in business under a court-appointed trustee. You file a detailed reorganization plan that outlines how creditors will be paid.

What Debts Can’t Be Discharged in Bankruptcy?

Business owners can have different kinds of debt that convince them to file for bankruptcy. But it’s important to keep in mind that when submitting an individual Chapter 7 application, that will discharge your personal liability for a business debt, but not the business debt itself. 

In Chapter 7 bankruptcy, you can wipe out certain business and personal debts, such as:

  • Credit card bills
  • Medical bills
  • Lawsuit judgments
  • Unsecured debts owed by the sole proprietor, such as debt to accountants, suppliers, and consultants
  • Financial obligations through leases and contracts signed by the sole proprietor, including for rental property or rented equipment
  • Personal loans

However, none of these are secured debt or debts where you pledged property as collateral. Even if you file for bankruptcy, your lender is allowed to take back the collateral you used to secure the loan. If you owe more on a secured debt than the collateral is worth, the deficiency — or the difference between the two — can get discharged in bankruptcy.

There are debts that survive Chapter 7 bankruptcy and are not dischargeable, meaning you’ll still owe it once your bankruptcy has been approved. They include:

  • Unpaid child support or alimony
  • Court-imposed fines or restitution payments
  • Recent back taxes
  • Debt on any luxury items purchased during the 90 days before you filed
  • Debts from fraud, embezzlement, or larceny
  • Debts incurred from causing death or injury due to driving under the influence

You also can’t discharge taxes on your payroll, since business owners are held personally liable for any unpaid payroll taxes.

If this sounds complex, it is. That’s why before you make a decision on what kind of bankruptcy would work best for your business, consider finding a bankruptcy attorney to advise you about your options.

Trust an Experienced Bankruptcy Attorney in Louisiana

When you’re considering this process, a good bankruptcy attorney can help you understand which approach to bankruptcy is going to work best for your situation, and how to best proceed afterward. 

Orum Young Law has more than 35 years helping the people of Northeastern Louisiana file for bankruptcy and regain control of their finances. In those 35 years, we have filed more than 20,000 cases and experienced unbelievable success. We help our clients understand the basic aspects of their case, including how to determine their expenses and handle any necessary filings. 

Contact us today at (318) 450-3192 to schedule your free case review and start protecting your family’s future.