Business or Personal Bankruptcy

I received today a frequently asked question from the owner of a small business which was having financial problems where the owner was personally liable for many of the business debts. In this common situation, the owner usually wants to know if the bankruptcy solution involves a personal bankruptcy, a business bankruptcy, or both. In most cases, I advise people to start with a personal bankruptcy, and in most cases a business bankruptcy is unnecessary. Regardless of what happens to the business the owner cannot get a new start unless he discharges his personal liabilities in bankruptcy.

The business bankruptcy does not discharge any debts. Only individuals receive a bankruptcy discharge. A business bankruptcy functions more like a receivership. The bankruptcy trustee assembles business assets, liquidates the assets, and distributes available proceeds to business creditors. A business filing bankruptcy is still legally liability to its creditors after going through bankruptcy. Business bankruptcies are useful for small business that want to avoid defending multiple lawsuits and collection effort from business creditors by turning over asset liquidation to the bankruptcy trustee.

The owner of a failed business can move on in life without bankruptcy if the owner is not personally liable on business debts. However, the owner will not find relief from any of the business debts if he is personally liable until filing personal bankruptcy. For these reasons, I usually try to help the small business owners with a single personal bankruptcy if possible.

posted by Jonathan Alper, bankruptcy attorney, Orlando, Florida