As consumer-orirented Denver Bankruptcy Attorneys, we represent many individuals who own or have owned small businesses. Often, we get questions about filing a “business bankruptcy.” The client’s thought process is that the business itself would be filing for bankruptcy. Rarely is this the case. A more accurate phrase would be “business-related” bankruptcy.
A business entity is ineligible for a bankruptcy discharge. There are two narrow circumstances where the business itself would file bankruptcy. If a business wishes to reorganize and continue to operate, a Chapter 11 reorganization might be appropriate. Or, if the business actually owns a lot of business equipment or other business property, a Chapter 7 bankruptcy might be appropriate so that a bankruptcy trustee can liquidate the assets for the benefit of creditors. Such a trustee liquidation enables an individual debtor to avoid potential lawsuits over the liquidation of the property.
Absent those two exceptions, normally an individual debtor files a “business-related” bankruptcy because in the context of a small business the debtor usually has a personal guarantee for the debts of the businesses. Therefore, even if the business did file bankruptcy, the individual debtor would still get sued for the debts of the business.
If more than 50% of an individual’s total debt is related to business purposes, the case is considered to be a non-consumer bankruptcy and therefore the means test is not a factor in determining Chapter 7 eligibility. More about means testing is located here.
Most people who come to us for a small business bankruptcy consultation have a small business with few or no assets but with a large credit line or multiple debts or credit cards used to fund business activities. In many cases, they are being sued as the personal guarantor for one or more of the business debts. Through Chapter 7 bankruptcy we stop the lawsuits, end the harassment, and prevent wage garnishements all while enabling the client to keep all of his or her personal property in most cases.