Bankruptcy for Small Business Owners in Colorado

July 19, 2011

By: David M. Serafin

As a bankruptcy and tax lawyer in Denver and all of Colorado, I am retained by a disproportionate share of small business owners who have personally guaranteed business debt.  Most of these small businesses are either LLCs or S Corporations whereby husband and wife are the sole members/shareholders.  The business debt which is personally guaranteed is often comprised of credit cards, lines of credit, a long term lease of real property or anything else financed to further the business.  In today’s restrictive lending environment, a bank or credit union is highly unlikely to finance debt incurred to start and operate a small business absent a personal guarantee by one or more owners.

For the overwhelming majority of Colorado small business owners holding a suffocating amount of personal debt and guarantees for business debt, the chapter 7 or chapter 13 personal bankruptcy process is more than sufficient to eliminate debt and provide the desired “fresh start” that a bankruptcy offers.  

Even for small business owners who wish to discontinue business operations, it is rarely necessary to file a corporate bankruptcy (in the name of the business) in lieu of dissolving the business (paying back creditors and then equity holders) and ceasing operations.  The personal bankruptcy (unlike chapter 7 matters, chapter 13 bankruptcy can only be filed by individuals) will discharge 0% to 100% of both personal debt and personal guarantees made for business debt.  Business owners who pass the Means Test and who have no equity in the business will be able to discharge almost all (if not all) of their unsecured debt.

Small business owners in Colorado who intend to keep their business functional will need to provide me with both a Profit/Loss statement (to determine business income/expenses for the Means Test for the six months prior to the bankruptcy filing) and a Balance Sheet (to determine the book value of the business).  Business owners who do not pass the Means Test (which examines both business and personal income/expenses in comparison to household size) and who have equity in the business will pay back some or all of this debt back (interest free) in a chapter 13 bankruptcy plan over three to five years.  The chapter 13 filing will prevent a chapter 7 bankruptcy trustee from liquidating the business and compelling turnover of non-exempt business assets by allowing the debtor to pay back the value of the non-exempt property through the chapter 13 plan.

LLC members whose business income/deductions/losses “flow through” to Schedule C of their individual tax return (Form 1040) may be personally liable for income or payroll taxes to the IRS or State of Colorado attributable to their business.  Considering the high priority of tax debts, it is imperative to analyze whether the taxes can be fully or partially discharged in chapter 7 or 13 or, alternatively, paid back penalty and interest free in a chapter 13 plan. For more information, contact an Aurora business debt lawyer at (303) 862-9124.

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