Challenge of a Purely Business Chapter 7 Bankruptcy
Seeking a purely Business Chapter 7 Bankruptcy? The good news is that more small business owners will be able to take advantage because of a new law. Bad news is many business owners find out much of their businesses’ debts are legally the individual’s personal debt.
I am Michael Franco, a State Bar Certified Specialist in bankruptcy Law. I want to share some facts you should know. With over 20 years of experience in consumer bankruptcy practice I have heard numerous situations where a business owner wants to discuss filing a business Chapter 7 bankruptcy – purely on the business – without filing bankruptcy personally.
To limit liability most business owners set up a separate entity business as an S or C Corporation or even an LLC. What many small business owners do not realize is that most “business debt” is legally their “personal” debt. It is rare for a small business to have separate stand-alone credit. A business starting out lacks the assets and cash-flow history to warrant its own independent credit. Business lenders will grant a business loan but it will contain personal guarantees or while in business’s name really be a personal loan by the business owner. How many business owners take up the major bank ‘Business Credit Card’ offer and then do not read the fine print, the legally binding agreement? Most do not read the details and simply click ‘I Agree.’
Details to Have at Hand When Calling a Business Bankruptcy Attorney
If you are exploring your options to possibly file a business Chapter 7 bankruptcy these are the questions you should be prepared to answer.
- What are the debts of the corporation or business?
- Who is the creditor – i.e., who is the listed person owing the money?
- Do you have all the financing documents? What do they say?
- Does the signature line have two places to sign? One space for the business president or CEO and another space as a personal guarantee of the business debt by the same president or CEO?
Is there a section in the financing agreement that talks about personal liability or personal guarantees?
- Did the business take out an SBA loan? What are the terms of the SBA loan? Did the SBA loan have a personal guarantee? Did the SBA file a UCC-1 financing statement with the Secretary of State – effectively putting a lien on non-real estate assets of the of the business borrower?
- Did any lender including but not limited to the SBA, put a lien or trust deed against the president or CEO’s personal residence?
Note that the identifying comments of president or CEO are not limitations – the person responsible for the finances of the business could be the chief financial officer, or just about any other person identified as affiliated with the business. It really matters what the financing documents say.
Business Loans & Credit Cards Are Often Not Business Debt!
I have had cases where business owners tell me that there is a purely business credit card, but it turns out that the credit card was put in the name of the business as an authorized user – but the credit card liability is personal to the business owner. While you may have a credit card in the name of the business that does not mean that the business is liable on the contract for the debt.
A quick example: when I was in high school, I was taught how to golf by some of my classmates who were on the golf team. On the course I went into the Pro shop with my friend and he put down an American Express Gold card with his name on it. I was astonished “You are seventeen how can you get a credit card?” My friend laughed and said, “It is my parents’ account – I am only an authorized user.” At that time, my father did not even have an American Express card let alone a Gold card. That was an early pivotal moment when I realized – I had no idea about basic finance.
The point of this discussion is to inform the business owner about the sort of information necessary to discuss financial relief options. It is difficult to discuss your personal and business debt relief options if it is unclear which are personal and which are exclusively business. The discovery that the majority of what were assumed to be business debts actually end up being the liability of the individual business owner will impact the desirability of filing a business Chapter 7 bankruptcy.
New Opportunities for Small Business Bankruptcy
The financial stresses of the 2020 Pandemic have many business owners feeling overwhelmed and wanting to throw up their hands in frustration. That said, there might be some good news… The difference between the debt relief available in 2020 and relief from January 1, 2021 forward is that personal liability will be greatly impacted by California’s increase in the homestead exemption. AB 1885 opens the door to many more small businesses. (Read more about that new law HERE).
Up until this recent law change in California Homestead Exemption Law (Jan 1, 2021), responsible bankruptcy attorneys would recommend against filing a personal or business Chapter 7 bankruptcy because the potential debtor had too much equity in their personal residence.
Now, with the significant increase in the homestead exemption to $600,000 in Los Angeles and Orange counties, previously unworkable financial situations now may become viable Chapter 7 bankruptcies – even for Covid-19 impacted small business owners. This is not a guarantee of an outcome as every situation is unique and this discussion is not intended to be the final word on any situation. This discuss is intended to be the beginning of an exploration of new options for finding a fresh start using the new opportunities in bankruptcy law. The above comments highlight the importance of having all relevant financial information so that the decision-maker can make an informed decision about how they would like to proceed.
If you have been discouraged from considering a business Chapter 7 bankruptcy in the past months, the new Homestead Exemption law change in California may make bankruptcy relief a viable remedy. You should contact an Orange County bankruptcy attorney to find out if the new 2021 Homestead law change might solve your financial dilemma.