How Bankruptcy Helps Small Business Owners Facing Personal Liability

For small business owners in Georgia, personal and business finances can easily overlap. Sole proprietors and individuals who sign personal guarantees on business loans are personally responsible for those debts. In some cases, the owner’s assets serve as collateral. When the business suffers financial strain, these liabilities can lead to collection measures and eventually to lawsuits. Bankruptcy protection offers ways to address these debts, giving owners a chance to protect essential assets from creditors.

Many small businesses are sole proprietorships, so the individual owner and the business are one and the same. If you are in this situation, Chapter 13 may be a well-suited remedy. Filing this form of bankruptcy causes an automatic stay to go into effect, which puts a stop to collection activity by creditors. You then propose a repayment plan to repay secured debts and partially repay unsecured debts over a three- or five-year period. The length of the plan, as well as the amount of your monthly payment, depends on your disposable income. 

The Chapter 13 plan requires bankruptcy court approval. To be eligible, your secured debts must be under $1,580,125 and your unsecured debts must be under $526,700. Business debts you personally signed for are included in these ceilings.

During the life of the Chapter 13 plan, your assets are protected from creditors and your business can remain in operation while it returns to profitability. You must be prompt in making all payments and must pay recurring fees to the U.S. bankruptcy trustee as well as other associated expenses. Once the repayment plan is complete, your remaining unsecured debt is discharged.

Chapter 13 is available only to individuals, so a small business that is a separate entity, such a corporation or an LLC, is not eligible. Such companies can seek bankruptcy protection under Subchapter V of the Bankruptcy Code, which works similarly to allow repayment of debts over extended time periods. However, if you are an owner of such an entity and you co-signed or personally guaranteed a business debt, it remains as your separate personal obligation. The creditor can enforce it unless the Subchapter V plan pays the guaranteed debt in full or the creditor voluntarily releases the guarantee as part of a negotiated deal. For that reason, it may be necessary for you to file a parallel Chapter 13.

Finally, it may be possible to pursue a Chapter 7 bankruptcy. If your debts are primarily business debts, you do not have to satisfy the means test required for most Chapter 7 filers. A Chapter 7 can discharge all your business and personal debts and allow you to protect your property through use of Georgia bankruptcy exemptions. Chapter 7 may be suitable when the business is failing and unlikely to recover.

If you are a Georgia business owner facing personal liability for business debts, Jeff Field & Associates can help you find relief. We have offices in Douglasville, Gainesville, Bogart, Lawrenceville, Marietta and Decatur. Please call 404-381-1278 or contact us online to schedule a consultation.