Small Business Bankruptcy
Debts incurred by a business can dramatically affect the personal finances of its owner(s), regardless of the type of business entity formed. One of the few Denver business bankruptcy lawyers with a Master’s Degree in Taxation, attorney David M. Serafin has advised numerous small business owners in Colorado who have personally guaranteed business debt and who are uncertain as to the future of the business. Many, although not all, of these businesses are LLCs or S-Corps (with one or a few shareholders). For most of these individuals, the filing of a chapter 7 or chapter 13 petition in Colorado Bankruptcy Court may provide a fresh start.
Type of business
The first question to ask is regarding the structure of the business entity itself. A sole proprietorship cannot file itself as it is not an independent legal entity. Rather, the owner must file for personal bankruptcy. All assets owned and debts owed (whether for personal or business purposes) must be listed in the bankruptcy schedules of the individual business owner, who may elect to file for chapter 7, chapter 11 or chapter 13 bankruptcy (the latter if the total amount of unsecured debt is within certain limits). An individual, whose debts are mostly business related, who files for chapter 7 is not required to pass the Means Test in Colorado regardless of income and expenses.
But, a C Corp, S Corp or LLC may file for either chapter 7 or chapter 11 bankruptcy. (Chapter 11 matters are not typically handled by this firm and will only sparingly be discussed further and Chapter 13 is only available to individuals, not businesses.) So, particularly if a personal bankruptcy will discharge any personal guarantees made for business debt, the question arises when a corporation should file for chapter 7.
When should a corporation file for Chapter 7?
Unlike an individual, a corporation is not entitled to a discharge and the “fresh start” that chapter 7 typically ensures. As such, we believe that chapter 7 is only appropriate for a corporation if a director or officer is personally liable for a non-dischargeable debt such the trust fund portion of employment or payroll taxes. The automatic stay rules will prevent an unsecured creditor from putting a lien on or levying upon corporate assets so that a debt for which a director or officer is personally liable can be paid. The Colorado Bankruptcy Court will appoint a chapter 7 trustee to administer the bankruptcy estate with the goal of liquidating business assets and to wind up the business in order to first pay priority taxes. The chapter 7 filing should also minimize the likelihood of creditor lawsuits against the corporation’s directors or officers. Thus, a chapter 7 for a small business is optimal is the business is failing and if its debts significantly outweigh its assets. Depending on the income and expenses, compared with the assets and liabilities of the small business, The Law Office of David M. Serafin will advise you as to whether a chapter 7 business bankruptcy is appropriate or whether it’s preferable to simply walk away.
For the individual debtor who is personally liable for business debt (regardless of whether most of the debt is business related), a chapter 13 is the best route – particularly for successful businesses with valuable assets. Chapter 13 can often prevent a chapter 7 trustee from liquidating a business by allowing the debtor the opportunity to pay back the pay back any non-exempt equity, above and beyond that protected by the Colorado tools of trade exemption, into the bankruptcy estate for up to 60 months.
Call the Law Office of David M. Serafin at (303) 862-9124 for a free initial consultation if your business faces unsustainable debt. An Englewood individual bankruptcy lawyer, David M. Serafin will thoroughly explain the best options for you and your business.