How Do I File for Bankruptcy? 7 Steps for a Business Owner With Personal Guarantees

Unfortunately, most business owners don’t know that if they personally guarantee their business debts, they must generally file personally to get rid of that debt. It is highly common for business debts to be guaranteed personally by an owner of a business, or the president or director of a corporation.

A business bankruptcy filing has no bearing upon the liability of the persons who have guaranteed the business debts. A business bankruptcy filing will only resolve the liability of the company as a corporate entity, and the business entity is the only debtor in the business bankruptcy case. Each separate party who guarantees the business debts, is separately liable for that debt and has an individual obligation to pay the debt. Cynically, creditors know this fact and so often intentionally go after a personal guarantee because of the fact that they cannot get repaid from the corporation.

It may be easy or difficult to find all of your business guarantees. You may not be aware of all the contracts and guarantees that you may have signed. If you have signed a personal guaranty, it is very important that you determine what property (or collateral) secures your guarantee. Business debts that are guaranteed by a personal guarantee may also be secured by a lien against the business assets. This matters because a discharge of the debt in bankruptcy does not automatically discharge the lien against the collateral (if any) that secures a business debt and personal guarantee. You need to make sure that you understand your liability, what collateral secures that liability, and your options to free yourself from both.

Both Chapters 7 and 13

Both Chapters 7 and 13 may provide a means for individual owners of a business (and personal guarantors) to obtain a discharge of their personal liability on their business debts. Which type of bankruptcy is best for you depends on your circumstances and goals and what you hope to accomplish.

Chapter 7: A Chapter 7 bankruptcy case provides a discharge of debt for the individual only. A Chapter 7 does not involve a payment plan of any kind. If your debts are mainly consumer, the means test applies to determine your eligibility. If your debts are mainly non-consumer debts, the means test does not apply. For many owners, the quickest and fastest way to get out of business debts is often Chapter 7 and that discharge is attainable within a few months of filing.

Chapter 13: A Chapter 13 is also a discharge for the individual, but a Chapter 13 involves a payment plan. The payment plan lasts for several years before you receive a discharge. Many people opt for a Chapter 13 over a Chapter 7 to keep important assets, such as a home. Not every business owner will qualify to file Chapter 7 and not everyone wants to. There are many requirements that need to be met in a Chapter 13 to be eligible to file and be approved by the Court. It can be difficult for a business owner who has personally guaranteed business debts and owes a lot of money, to meet the debt limits to qualify to file Chapter 13. The sum total of unsecured debts must be under $526,700 on your filing date.

Neither chapter is the same as a Chapter 11 reorganization or Subchapter V, which may allow a business to restructure its debts. Just because a company restructures its debt in a business bankruptcy, this does not nullify an individual guarantee. The individual will still be liable to the creditor and be subject to collection action by the creditor.

Before Filing a Bankruptcy Case

Once you have decided on the type of bankruptcy you wish to file, the next steps are to complete mandatory pre-filing credit counseling and determine which of your property may be subject to creditor claims. The credit counseling course must come from an approved agency. This certification must be no more than 180 days old on the date you file your case. You will also want to take a look at federal and state exemptions and decide which to use before you file your case. When a house is involved, the amount of equity in the house matters. You will need to look at the exemptions and whether you have enough to protect the value of the house. If the exemptions are enough, a Chapter 7 may still work.

Whether you file Chapter 7 or 13, you must file in your own name and list every creditor that may have a claim against you. The bankruptcy petition must list all debts from any guarantee. An immediate benefit of filing bankruptcy is the protection against creditor collection provided by the automatic stay. The automatic stay prohibits most collection efforts against a debtor from the moment of filing. A case may stop lawsuits, freeze bank levies, stop wage garnishments, and halt judgment creditors from executing against property. But filing at the right time can matter, depending on what you want and what collection threat exists.

In a Chapter 7 case, 21 to 40 days after filing, there will be a meeting of creditors. You must attend the meeting and be prepared to answer questions about your assets, debts, and financial history. After filing your petition, you must also take the debtor education course and file proof of completion.

Lenders and landlords may object to your discharge in bankruptcy. Common objections include allegations of fraud or that you misrepresented a financial condition. Saying you lied is one thing. Making a judge agree is something else. The creditor has to object in bankruptcy court and prove that a fraud was committed by you. If it does not act in time, your debt may be discharged. Still, if a judge agrees with the creditor, the result is the exact opposite. The debt will survive the bankruptcy.

Getting Your Discharge

Getting your discharge is your goal, but as much as a discharge will do, it will not fix everything, especially if you run a business. A discharge benefits only the person who files. You may receive a discharge of liability on debts you personally guaranteed, but the discharge will have no bearing on the other individuals who also guaranteed the same debt. Business debts you incur and guarantees you execute after you file for bankruptcy may not be dischargeable.

Take care of your own problem, but keep in mind a viable solution for the business. Personal bankruptcy may solve an individual’s liability on a debt, but it won’t fix the problem the business is having. Even if you can walk away from the business with a bankruptcy, you have to know how to shut it down.