If you own a business and have acquired debt associated with your business, you may ask, can my business file for bankruptcy? The short answer is yes, a business can file for bankruptcy. With that said, for most business owners considering a business bankruptcy filing, they should ask, should my business file for bankruptcy? The answer to that question for most businesses is no. The reason most businesses should not file for bankruptcy is because a business cannot receive a discharge of its debts in chapter 7 bankruptcy, making the entire exercise of filing for bankruptcy a bit pointless unless you have a business that owes certain insurance premiums owed to Washington state or simply need somebody to liquidate assets of your business. While certain state taxes are still not discharged in a business bankruptcy filing, Washington state does have a law under RCW 51.48.055(4) and RCW 50.24.230(3), which says if your businesses goes through the bankruptcy process then the liability for the business taxes may not fall on to the officers of the company personally. A chapter 7 bankruptcy for a business serves the purpose to help wind up a business and have a bankruptcy trustee dissolve all assets that a business may own. Section 727(a)(1) of the United States Bankruptcy Code says that “The court shall grant the debtor a discharge, unless the debtor is not an individual.” Since businesses is not considered an individual, it cannot receive a Chapter 7 discharge. Therefore the only way to discharge liability would be to file a personal bankruptcy to discharge personal liability of a debt if you have creditors who are trying to collect from you, associated with a business that you may own, or have owned in the past.
Most debtors considering filing a bankruptcy for their business do not think about whether they are personally liable for debts under the business or not. If a debtor files for bankruptcy only for the business, then the creditor may come after the debtors who guaranteed any loans as the individual would not be filing bankruptcy. This means that most business owners should be asking whether they should file a personal bankruptcy or not, not whether their business needs to file for bankruptcy. Most business don’t have any assets that that are owned free and clear, which means they have no equity or value to a bankruptcy trustee. If the business ceases operation, the bank will reposes what they can, but if there is still a debt owed by the business, creditors will seek compensation from whomever guaranteed the loan, which means the business owner may be personally liable. If you file an individual chapter 7 bankruptcy you may discharge your liability on any small business debt that you may owe personally or reorganize or pay a portion of this debt through a chapter 13 bankruptcy. If chapter 7 or chapter 13 bankruptcy is not an option due to income of your household or you own assets above the amount you are allowed to keep, then debt settlement might make sense for you to negotiate a settlement of your debts with creditors where they may take a fraction of what you owe them, if you can show a hardship and can come up with a lump sum to pay them off.
Most businesses who do end up filing a bankruptcy, do so in order to reorganize their debts so they can continue to operate while going on a repayment plan with creditors through a chapter 11 bankruptcy. Chapter 11 bankruptcies can be very expensive and burdensome so business owners should really think about whether a chapter 11 makes sense and consult with a bankruptcy attorney who handles chapter 11 bankruptcy cases on a regular basis. In 2020 a new subchapter V, of chapter 11 bankruptcy was introduced for small businesses which does lessen some of the requirements and costs involved with a chapter 11 case, but the case will still incur significant costs in order to move forward as a Chapter 11 trustee will be appointed to the case and they can charge a reasonable fee on an hourly basis in order to get compensated out of the case. Furthermore a business could also end up being liable for creditor fees incurred as part of your chapter 11 bankruptcy case, you may have to file monthly reports and quarterly fees to the US trustee who oversees all bankruptcy cases. Additionally if you are unable to propose a viable repayment plan in chapter 11, then your creditors could force you into a chapter 7 liquidation case which is the last place a debtor wants to be if they have significant assets of value. Finally in a chapter 11 case, if you want to dismiss your case, it requires you file a motion with the court asking for dismissal, which could also be opposed by your creditors if they want to try to get you into a chapter 7 bankruptcy cases. So unless you are ready fort he responsibilities, costs and risks of a chapter 11 business bankruptcy case, it may not be your best option and solution to your debt issues that you may be haing.