Bankruptcy for an LLC: 6 Rules That Differ From Personal Bankruptcy

If you’ve formed an LLC, the LLC is a debtor separate and apart from you. The LLC can file its own bankruptcy, and it has to do so separately from you. When it comes to bankruptcy, there are significant differences between filing for a personal case and an LLC/corporation/partnership case. LLC Chapter 7 gets you out of business, but doesn’t get rid of the company’s debts.

The Business Gets No Discharge

The first rule in filing a Chapter 7 business case is that the business gets no discharge. The bankruptcy does not discharge the LLC’s debts or make them go away. It just gives the company a legal way to dispose of all of its assets under the supervision of a trustee. In an LLC Chapter 7, the trustee takes over all of the assets of the company and disburses them to creditors. In some situations, the court will let the trustee keep the LLC open for a limited time while it is liquidating the assets.

While people can claim some exemptions in a Chapter 7 case, LLCs cannot claim exemptions. So the trustee can take everything that isn’t otherwise protected from creditors.

File a Repayment Plan

Another thing that you can’t do with your LLC is file a repayment plan. Chapter 13 is only for individual filers. While a Chapter 13 bankruptcy can help a sole proprietorship, it won’t help a business that is an LLC, a corporation or a partnership. If you file a Chapter 13, you can repay the LLC’s creditors through the personal Chapter 13 if you are personally liable for the LLC’s debts.

If you want your LLC to survive, then you will have to consider Chapter 11. The business Chapter 11 is for organizations that want to restructure their debt. Chapter 11 cases involve a lot of work. In a Chapter 11 case, the company can keep its assets and create a repayment plan for its creditors. As part of a confirmed Chapter 11 repayment plan, LLCs and Corporations can receive a discharge of debts. A confirmation of a plan generally discharges most (but not all) pre-filing debts. If the Chapter 11 plan calls for liquidation of the company, then it does not receive a discharge.

There is a special, streamlined Chapter 11 called subchapter V that is available for smaller businesses with total debts of $3,424,000 or less. The debtor company controls the property but needs court approval for some important decisions. The plan must be filed within 90 days of the filing of the petition, unless the court extends it.

There is no means test for corporations and LLCs. Credit counseling is a requirement for individual bankruptcy cases, not for companies.

An individual can file bankruptcy on their own without an attorney but a corporation or LLC must have an attorney represent them in a bankruptcy case. One reason for this is the fact that a corporation or LLC is a separate entity from the individual filing. Even if you’re the sole member of the LLC, the law requires an attorney to represent the LLC in the filing.

Personal Liability

Many LLC filers are under the mistaken impression that an LLC filing will protect them, too. For example, one scenario that could expose you to personal liability is signing a personal guarantee for LLC debt. In that case, the LLC bankruptcy won’t stop a lender from pursuing you to collect what it’s owed. If you took out personal loans to fund the LLC, you’ll have to pay them back yourself.

The federal government can also make you personally responsible if your business doesn’t pay its payroll taxes. The trust fund recovery penalty can be assessed against the individuals who were in charge of the business and willfully failed to pay, even if the business keeps operating. This penalty is equal to 100% of the unpaid tax.

Here’s an example: you’re a member of a construction LLC. The business takes out a loan to buy equipment, and you sign a personal guarantee. Then, you put the company’s payroll and supplies on your personal credit cards to get the business through a slow period. If the company closes, the LLC still owes the lender the unpaid portion of the loan. The lender can come to you for the money personally. The credit cards stay with you, too.

If you’re considering bankruptcy, the first step is sorting out which debts are your debts and which debts are the LLC’s debts. Check who signed the loan agreements, guarantees, and leases. As you get into the details of what your business owes, you may find that the company and you have related but separate problems. If you’re facing liability for LLC debt personally, you may need to consider filing a personal bankruptcy case to protect yourself.