Can a Business File Bankruptcy?
Yes a business can file for bankruptcy, but a business owner will need to determine whether it will make sense to file a business bankruptcy, or deal with the debts on a personal level through a personal bankruptcy or debt settlement. A business is eligible to file Chapter 7 or Chapter 11 bankruptcy. Chapter 7 bankruptcy is a complete liquidation of the businesses assets and debts, but the catch is that a business does not get a discharge of debts. This differs from a personal chapter 7 case in which the individuals are usually given a discharge of debts that are eligible for a discharge. A Chapter 11 bankruptcy is a type of bankruptcy that allows a business to reorganize its debt in a payment plan. This type of bankruptcy is usually filed by high net work individuals or businesses who want to remain in open and figure out a way in which to pay their debts over time. Chapter 11 bankruptcy cases have many requirements and can be very expensive due to the complexity of the cases and requirements.
You can check out the audio conversation I had regarding whether a business can file bankruptcy that was live on 1150AM radio here:
(1) Does chapter 7 bankruptcy make sense to file for the business if no discharge is given?
In most cases the answer is no because a business cannot receive a discharge of debts, which means the business will still have debt at the end of the bankruptcy filing. With that said, there is a situation in which it would make sense for a Washington state business to file for chapter 7 bankruptcy. In Washington state, individual owners of a corporation or LLC are generally personally liable for all of the taxes incurred by the corporate entity, however Washington state law provides that the individual owners of a corporation or LLC will not be liable for premiums owed to the Washington State Department of Labor and Industries [See RCW 51.48.055(4)] and the Washington State Department of Employment Security [See RCW 50.24.230(3)] if the business associated with the debts files and completes a Chapter 7 bankruptcy.
Therefore, the only reasons in most cases it makes sense for a business to file chapter 7 bankruptcy is to either get some help liquidating assets or avoid personal liability on L&I taxes by completing a Ch. 7 case which is solely based on Washington state law, not Federal bankruptcy law.
(2) Can Individuals file for bankruptcy to get out from business debts?
In many cases the answer is yes if the business owners have personally guaranteed the unsecured business debts. Debtors best options will likely be to need to negotiate settlement for less than the full balance on the debts or file a personal chapter 7 or chapter 13 bankruptcy to escape liability if they qualify and it makes sense. With that said, filing a personal bankruptcy may not relieve a person of Washington state L&I premiums, which is why a corporate chapter 7 bankruptcy filing may be necessary as well to get out from that type of debt.
(3) What happens if a business files chapter 7 bankruptcy?
The first step after filing a bankruptcy case, is that a bankruptcy trustee will be appointed to the case. Their job is primarily to liquidate assets and pay creditors from their proceeds. If your business does not have many assets, your case may close in about 90 days. Otherwise the case can stay open until all assets of value are liquidated and creditors paid. The case will close without a discharge of debts, which is different than from a personal bankruptcy, where an individual can receive relief from their debts.
(4) What if I don’t owe L&I Taxes related to my business?
If you don’t have any Washington state L&I taxes to worry about, then it makes sense to simply dissolve the business and assets on your own and then if there are other unsecured debts you are personally liable for from the business, file personal bankruptcy if it makes sense or settle your debts outside of bankruptcy.
(5) Can my business be sued after it is closed?
The short answer is yes, but if the business has no value or assets, then any judgments against the business will be moot. If you have dissolved the business, then you should be more worried about being sued personally if you have personally guaranteed the debts.
(6) How much money can I make personally to qualify for chapter 7 Bankruptcy?
The amount you can make varies based on your family size and your household gross income. However there is an important exception in the bankruptcy code where if 51% or more of your debt is business related, you don’t have to pass something called the means test and the income limits don’t apply to you. With that said, you will still need to show on bankruptcy schedules I & J of the bankruptcy petition, which shows your current income and expenses, that you don’t have disposable income in which to pay creditors.
At the end of the day, if business dream does not play out the way you expected, at least you know you have options in which to start rebuilding your personal credit and financial situation. If you live in Washington State and are looking for assistance in managing your business related debts, give Symmes Law Group a call at 206-682-7975 to speak to a bankruptcy attorney and learn about your options.