Why Business Bankruptcy is Often Personal

            As we all know, not all businesses can thrive in a great economy and many businesses are currently stretched thin in the current less than ideal business climate.  Unfortunately, some businesses just don't make it and that is when they often call Halcomb Singler, LLP, and tell me that they need to file a bankruptcy for their business.

          While it is true that some businesses do need to file a bankruptcy, what ends up happening in many of these cases is that the business owner(s) file bankruptcy and the business simply closes its doors.  When I tell potential clients this they are often surprised.  The business owner is normally thinking that they spent money for an attorney to incorporate their business and therefore a corporate shield went into effect and protects the business owners from the liabilities of the corporation.  While, it does make sense for businesses to be set up as legal entities, many businesses cannot fail without dragging its owners down with it.  The simple reason for this unfortunate truth is the personal guarantee.

            For those starting a business, the personal guarantee almost goes without saying.  There is little chance that a bank, a landlord or even a company that rents copiers is going to give your new company credit without you having a little skin in the game.  Creditors do that by requiring a personal guarantee of one or more of the owners of the business.  By signing a personal guarantee the business owner agrees that if the business is not able to meet the debt that the owner will pay it with his or her own money.  A personal guarantee "trumps" a business entity and is enforceable by the creditor should the business not be able to make good on its agreement.

            As a result of many creditors requiring a personal guarantee, the owner of a failed business may be on the hook for thousands of dollars on top of the fact that they are out of a job due to the closing of the business.  When the landlord, bank or other creditor with a personal guarantee attempts to collect the debt from the owner they may find bankruptcy to be a good option in helping the business owner to recover from the financial burden of the failed business.

            At that same time it is often not necessary for the business to file a bankruptcy.  This is true because in many cases the business doesn't really own much valuable "stuff."  For example, a failed landscaper may have some mowing equipment that he or she keeps in a storage facility.  If there is a secured loan (meaning the property is collateral and can be repossessed) on the mowing equipment the creditor on the mowers will come and pick them up from the landscaper.  The mower creditor will then attempt to sell the mowers and send the landscaper a bill for anything still owed after reselling the mowers.  Therefore, the only property that landscaper likely has left after the mowers are repossessed are a few old computers and some office furniture.

            Since there is really not any property left over there is little reason to go through the time and expense of a business bankruptcy.  This is true because in a Chapter 7 Business Bankruptcy the trustee would simply liquidate the un-exempt assets of the company, which can be done for much less money outside of bankruptcy.  Further, the filing of a personal bankruptcy (which is often necessary due to personal guarantees) can be structured to relieve the business owner of further collection attempts by business creditors.  True, the business itself can be sued, but does it really matter if the business owns no stuff and the owner has discharged any personal guarantee(s) in a bankruptcy?

            For those starting a business I cannot stress enough the importance of finding an attorney to show you how to set up the entity, to set up the entity for you, to show you how to maintain the entity, and to review the contracts that you will inevitably sign to get your business off of the ground.  I have met with many people who were not aware that a personal guarantee was in the contracts they signed while getting their business off of the ground.

            I wish all of you luck in your business ventures and hope that you never need to understand why business bankruptcy is often personal.  However, if you find yourself with a struggling business in the Indianapolis area and are attempting to evaluate whether bankruptcy is a viable option feel free to contact me by clicking on the link or call me at 317-575-8222 for a free initial consultation.

Halcomb Singler, LLP, is a debt relief agency.  It helps people file for bankruptcy under the bankruptcy code.  No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so.  The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses.