When a business files a bankruptcy case, it’s generally processed without holding the owners, members, or shareholders personally responsible for business debt. However, there are several scenarios when business owners can be held liable for business debts. Typically, this depends on the type of business, whether it’s a limited liability corporation (LLC), sole proprietorship, partnership, nonprofit, or other form of incorporated company. If you are filing bankruptcy in Mankato, MN and the surrounding areas for your business or your personal debts, Behm Law Group, Ltd. can help you put together a strong petition that will provide long-term, effective debt relief. Our attorneys work with clients filing for personal/business Chapter 7 bankruptcy or personal Chapter 13 or 12 bankruptcy.
Companies of any type can use Chapter 7 to liquidate their business assets in exchange for the discharge of business debts. This type of bankruptcy, while available to multiple types of businesses, can sometimes force the closure of all company operations. Chapter 11, 12, and 13 are all reorganization bankruptcies that usually allow companies to continue operating while they repay their debts under different and adjusted terms that are much more beneficial. Who can file which chapter does, however, depend on the type of ownership and the type of company involved.
Chapter 13 is generally a non-business bankruptcy, but filers who own sole proprietorship businesses can use this reorganization process to resolve their personal and business debts together in one case.
Chapter 12 bankruptcy is also a non-business bankruptcy, similar to Chapter 13, but it is intended solely for family farmers and fishers that make at least 50% or more of their income from farming and fishing operations. Filers that qualify for Chapter 12 use it to resolve their personal and business debts together.
Chapter 11 is usually reserved for businesses where the businesses propose chapter 11 plans of reorganization and reorganize their debts under markedly adjusted terms. Through this process, businesses can impair many rights that their creditors hold outside of bankruptcy. Most of the time, business owners, members, or shareholders will not be responsible for business debts in a Chapter 11 case. There are some exceptions to this rule, such as:
- A personal guarantee was made in the loan contract. This is often done for corporate credit cards and other unsecured business loans where there is no collateral involved. A personal guarantee clause can be included in loan/credit applications that makes business owners personally liable for business debts.
- If employers didn’t pay employee withholding taxes. If you fail to pay so-called trust taxes withheld from employee paychecks, such as FICA, etc., you will be personally liable if your business is unable to pay the taxes.
- The court has pierced the corporate veil of your corporation. If your creditors want to hold you responsible for business debts because of serious business mismanagement or fraudulent activity and the court agrees, you and any shareholders of company stock may be personally liable for the debts of the business.
Aside from these specific exceptions, you may not be responsible for business debts in a bankruptcy unless you are a sole proprietor or partner of the company involved.