Law Office of Rick Morin, PC

Businesses declare bankruptcy too. Business bankruptcies are typically much different than personal bankruptcies for one main reason. Read on to learn more!

Why do businesses declare bankruptcy?

Businesses declare bankruptcy for the same reason that regular people declare bankruptcy: insolvency. A business is insolvent when its debts exceed its assets. A business might become insolvent because of a large lawsuit, loss of a big client, or a project going bad.

Many businesses operate on credit. Defaults on credit

Business bankruptcy is often followed by personal bankruptcy

Most small business owners personally guarantee many of their businesses’ debts. This includes leases, lines of credit, credit cards, and loans. Because most small businesses do not have much in the way of assets, small business lenders need security from the owner before lending money to the business.

So even if a business declares bankruptcy, the owner may still be on the hook for some or all of the businesses’ debts. For this reason, a business owner might declare personal bankruptcy if the lenders turn around and sue the business owner after the business declared bankruptcy.

Business bankruptcy does not end in a discharge

This is the unique aspect of a Chapter 7 business bankruptcy. Corporations do not receive a discharge in bankruptcy. The sole purpose of a corporation to declare bankruptcy is to “wind down” the affairs of the business. This typically means that the Chapter 7 Trustee will sell assets and pay claims according to priority.

Unless there are assets in the business that need to be liquidated, there are not many reason to declare bankruptcy for a corporation. The business owner should instead evaluate their persona liability on business debts. A personal bankruptcy may be required depending on the extent of the owner’s liability.

My law firm assists business and business owners with bankruptcy in Sacramento. Please call us at (916) 333-2222 for more information about business bankruptcy.