Can Business Debts Be Discharged Through Personal Bankruptcy?
Depending on the organizational structure of the business, business debts can be discharged through either Chapter 7 or Chapter 13 personal bankruptcy. In short, debts incurred by sole proprietorships or general partnerships are covered by and can be discharged through personal bankruptcy while the debts of a limited liability company (LLC) or corporation cannot be.
The reason that the organizational structure of your business is the controlling factor as to whether or not its debts can be discharged in personal bankruptcy is because the legal organization defines the business owner’s personal liability for their company’s debts. In general, business debts can only be satisfied through personal bankruptcy if the legal structure of your business leaves you personally responsible for those debts. If your business is organized as a sole proprietorship, you have personal legal responsibility for all of your company’s debts. Any creditors to whom your business owns money can make a claim against your personal assets, such as bank accounts, in order to satisfy your business’ debts. General partnerships follow similar rules; the personal assets of all the partners can potentially be used to satisfy business creditors’ claims. Because the owner of a sole proprietorship or general partnership has personal responsibility for the business’ debts, these debts are dischargeable under either Chapter 7 or Chapter 13 bankruptcy.
On the other hand, if your business is a limited liabilty company or a corporation, the legal structure of the business protects your personal assets from business creditors; because you have no personal liability , personal bankruptcy cannot discharge business debts in these cases. In rare cases, however, a business owner may forfeit the protection offered by the legal structure of a limited liabilty company or a corporation; for example, if a personal guarantee is required by the bank in order to obtain a business loan or demanded by a landlord before renting space to your company. Any debts of an LLC or corporation for which you have assumed personal liability by waiving your limited liability privileges become dischargeable in a personal bankruptcy action.
