Bankruptcy is one of several ways for individuals and businesses in the United States to resolve debts they can’t repay. While there are different chapters of bankruptcy that follow some general processes and rules, there are also complicated aspects and nuanced conditions that change from case to case. When it comes to business bankruptcy, the question of who is liable for the business debts is a key point of the case. That liability is determined by the way a business is organized for tax, revenue, and general legal purposes. If you are considering using Chapter 13 or Chapter 7 bankruptcy in Waseca, MN, to resolve your business debts, Behm Law Group Ltd. can help you build a strong case for long-term debt relief and financial balance.
Bankruptcy
In filing for bankruptcy, the way that your business is established determines whether or not you’re responsible for its debts. When a business is set up as a sole proprietorship or partnership, for example, the owners of the business are personally responsible for their company’s debts. If a business is set up as a limited liability company (LLC) or corporation, on the other hand, the owners, members, or shareholders are generally not personally responsible for the company’s debts. Some lenders, however, will require the owner of a company to sign a personal guarantee for the company’s debts.
While business owners often establish their company as an LLC or corporation in order to not be held personally responsible for business debts, there is one exception where they can be held liable. A court process called “piercing the corporate veil” can render owners, members, or shareholders of an LLC or corporation personally liable for business debt.
To pierce the corporate veil of your company, your creditors need to file a lawsuit. If the court sides with your creditors, you, any other owners, members, or shareholders of your company’s stock may be forced to repay the business debt or include it in a personal bankruptcy case. If you aren’t filing for bankruptcy, your creditors can pull from your home, bank accounts, investments, wages, or other assets to repay the debt owed.
Chapter 7 Bankruptcy
If you are filing for bankruptcy, and the court pierces the corporate veil, your business debts are included in the same way your personal debts are. In a Chapter 7 bankruptcy case, your business debts will likely be included in the discharge process, but if they are secured to an asset, that property will also likely be repossessed and liquidated by the creditor to repay the debt. In a Chapter 13 case, business debts will be included for payment in your repayment plan.
Generally speaking, piercing the corporate veil in court is very rare. The process will only be approved if your company acted recklessly or fraudulently in its borrowing practices or business dealings, if your creditors were unjustly left with unpaid funds, or if there isn’t an actual separation between your finances and your company’s finances.
To learn more about how business debts are handled in a Chapter 13 or Chapter 7 bankruptcy in Waseca, MN, or the surrounding areas, contact Behm Law Group Ltd. by calling (507) 387-7200 or emailing stephen@mankatobankruptcy.com.
