Chapter 11 Bankruptcy: Personal Liability for Business Taxes

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When an incorporated business flounders financially, an owner may wish to file Chapter 11 bankruptcy. This form of bankruptcy will enable the business owner to work with the courts through a trustee to reorganize the business and put it on better financial footing. Bankruptcy liability may still exist for certain expenses.

A Chapter 11 bankruptcy filing will provide some relief for a business from its debts. For example, this reorganization may result in a reduction of debts or a lowering of monthly obligations under a payment plan. Taxes owed to the government, however, are not typically reduced or eliminated. A business owner, in fact, may be held personally liable for the repayment of taxes owed even with Chapter 11 bankruptcy protection.

What Chapter 11 Provides

When small business owners are faced with more debt than their businesses can afford to pay, a Chapter 11 filing can provide a number of protections that make it worth considering. This form of bankruptcy will enable the business to continue operations and may also offer such benefits as:

  • Consolidation of debts – Chapter 11 for a small business is similar to Chapter 13 for an individual. This chapter of bankruptcy law enables a business to have its debts consolidated for more manageable repayment over a set period of time.
  • Litigation protection – A Chapter 11 filing can protect a small business from other forms of litigation. For example, creditors included in the Chapter 11 filing will not be able to sue the business in question for failure to repay a loan.
  • Personal protection – A small business owner’s personal assets are protected from seizure when a Chapter 11 filing is in place. This does not, however, protect a business owner from having to pay taxes or face personal liability.

About Taxes

Chapter 11 may provide a business owner more time to pay taxes, but it does not remove the need to pay. Bankruptcy liability for payroll taxes and other taxes will generally still stand. Back taxes, however, may be consolidated for repayment over the source of several years. This may make it easier for a business to handle the repayment of the obligation.

Contacting a Lawyer

Bankruptcy liability can involve a business owner’s personal assets in some cases, especially in regard to taxes. If a business is in financial straits, it is often best for a business to seek the advice of a reputable lawyer before trying to move forward with a bankruptcy filing.

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