LLC Bankruptcy Louisville Attorneys
LLCs (limited liability companies) and corporations operate independently from their owners. This means that as its own individual entity, an LLC can incur debt and own property separate from the person who runs it. The reason for this is so business owners are protected on a personal level from the liabilities of the business, should it fail or incur increasing debt. It is also so that the business itself can be protected from the liabilities of its owner(s). Even so, some institutions like the Small Business Administration, or SBA, require LLCs to sign personal guarantees for any loans or debts they take on. This essentially renders the legal protections we just mentioned obsolete. In these cases, the guarantor or owner of the business becomes personally responsible for any debt incurred. Thus, if they lose grip of their financial situation, they may need to file LLC bankruptcy.
As you can see, there are many working parts to an LLC bankruptcy claim. There are many options available to you as a business owner, but your lawyer should consider your unique circumstances to ultimately determine what option may be best for you.
If I File Personal Bankruptcy, What Happens to My LLC?
As an owner of an LLC, you are likely faced with both personal debt and business debt. From here, you have a couple options available to you. When faced with these options, you must consider many factors to determine which route is best.
The first thing that must be taken into consideration is whether you are the majority owner of the business or in a partnership. If you file personal bankruptcy as the sole or majority owner of your LLC, your bankruptcy trustee may vote to either sell the business or liquidate it and distribute any proceeds to your creditors.
Your bankruptcy advisor will take a cost/benefit approach to determine whether it would be the best option to liquidate your business. When a business fails, your lawyer will review how much it would cost to dissolve and liquidate the assets, what they could sell for, and whether any of them are exempt from being sold. In many cases, when there is little left in terms of value to be gained by liquidating the company's assets, liquidation just doesn't make the most financial sense. However, if the business in debt has valuable, nonexempt assets that can be dissolved and sold, your lawyer will most likely advise this route.
On the other hand, if you are a partner of an LLC, a personal bankruptcy claim won’t always affect your business. Unless you are the majority shareholder, your trustee likely won’t pursue a dissolution of the corporation. It is also possible that in a partnership, you will need to sign a buy-sell agreement that requires that you relinquish your ownership interest before filing for personal bankruptcy. Failure to adhere to this agreement could result in a lawsuit against you from your LLC’s co-owners.
What Happens if a Corporation Goes Bankrupt?
There are two types of proceedings available for corporate bankruptcy: Chapter 7 and Chapter 11. Chapter 7 liquidates the assets, while Chapter 11 essentially reorganizes the business and allows it to continue operation. Corporations, limited liability companies, partnerships and sole proprietorships are all eligible to file for Chapter 7. However, it’s mostly a tool used by sole proprietors because once they pay their creditors, they will receive a discharge. Receiving a discharge means that the sole proprietor would no longer be liable for the repayment of business debts, even if they signed a personal guarantee.
Meanwhile, corporations, LLCs, and partnerships cannot receive a discharge like a sole proprietor could. In this case, if you’ve signed a personal guarantee, creditors may still come after your personal assets to try and satisfy your debt.
Chapter 11 bankruptcy allows a company to continue business operations while reorganizing debt. This is generally the best option when the company is not entirely underwater and can still be turned into a viable, money-generating business with some additional help.
A Chapter 11 business bankruptcy filing is a good option for companies that have regular revenues but are struggling to repay their debts. Should you go with this option, the court will need to review and approve your reorganization plan before it goes into effect and helps with repayment of debts.
Chapter 11 also leaves room to negotiate with creditors. For example, instead of a typical five-year repayment plan, the court may allow you to spread out the payments over 20 years instead. The goal of Chapter 11 bankruptcy is to provide businesses the opportunity and resources to get them back on their feet.
Can an LLC File Chapter 7?
If over half of the owner of an LLC’s debt is business debt, they may file for Chapter 7 bankruptcy. Chapter 7 bankruptcy uses liquidation to pay off debt to creditors. From a business sense, the business will need to close and all of its assets will be liquidated. The proceeds from this liquidation of assets will go straight to the business’s creditors.
Through Chapter 7, none of the business’s property is exempt from liquidation and it does not receive a discharge of debts. This doesn’t mean the debt doesn’t exist, though. The unpaid debt is still there, but the business simply no longer exists to pay it. If any personal guarantees to a business lender remain, the lender may pursue the guarantor to pay off the remaining business debt. However, if no personal guarantees exist, the debt seemingly evaporates.
An LLC may choose to file Chapter 7 to establish that the business is officially dissolved. If your business has aggressive, unrelenting creditors, this chapter of bankruptcy can offer protection by asserting that the liquidation process will be conducted by an independent third party. This makes Chapter 7 a good option for those who are constantly pressured and harassed by creditors.
However, there are some instances where filing for Chapter 7 bankruptcy is not even necessary for an LLC. For example, if the business in question has little to no assets left to liquidate, Chapter 7 won’t really get them anywhere. With no other parties liable to pay the debt and no assets to levy, creditors generally won’t waste their time pursuing a claim against the guarantor. In addition, there may be no point to file Chapter 7 if there is an overriding lien on all of their business assets by a financial institution.
Can I Keep My Business if I File Chapter 13?
Chapter 13 bankruptcy is different from Chapter 7 and Chapter 11 in that it is reserved only for individuals filing for bankruptcy. Corporations, partnerships, and LLCs cannot do so. However, if the business is owned by a sole proprietor, that individual can file for Chapter 13 bankruptcy for personal and business debt reorganization. This means that through Chapter 13, the owner of a business or LLC may file to eliminate their liability for business debts. The business itself is still responsible for paying back its own business debts, but all personal liability will be discharged.
Chapter 13 can protect all of your business assets while you work to pay back all or a portion of your debts through a restructured payment plan. Sometimes, reorganizing an individual’s personal debt may be enough to keep their business afloat. So yes, it is possible to keep your business running when you file for Chapter 13 bankruptcy.
How to File Corporate Bankruptcy
There is a distinct difference in filing for bankruptcy as an individual versus filing as a corporation, partnership, or LLC. Experienced bankruptcy attorneys like those at O’Bryan Law Offices can represent both individuals and business entities in bankruptcy claims. We will assist you throughout the entire legal process from beginning to end.
At our family-owned bankruptcy law firm, we work hard to find ways to keep your company in business through a comprehensive debt repayment plan. In other situations, however, we can show you that the business entity is not worth saving, and we’ll concentrate on minimizing your exposure to personal liability. Where the distinction between business and personal assets has been reasonably well-preserved, it might make sense to file separate bankruptcy cases for the business and the individual.
If You Need to File Bankruptcy for Business Debt, Contact the Experienced Bankruptcy Lawyers at O'Bryan Law Offices
If you are a business owner and you’re considering filing bankruptcy for yourself, your LLC, or both, the process will surely be complicated. There are many moving parts and things that must be considered when it comes to the relationship between your own personal finances and your business’s. It is important that you are made aware of all your options and that you choose the best one for your specific situation. For dependable advice about LLC bankruptcy, contact one of our knowledgeable attorneys at O’Bryan Law Offices for a free consultation today.