How Personal Bankruptcy Differs from Business Bankruptcy

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There is often very little difference between a personal bankruptcy and a business bankruptcy.  Legal variances recognizable by the bankruptcy court in the debt of a business existing separate and distinctive from the personal debts of the business owner or owners, if any, would arise based on the form of the business such as sole proprietor, partnership, limited liability corporation, and corporation.   

Sole Proprietor

Many bankruptcy courts do not recognize any separation between the debts of a business and the personal debts of the business owner.  The result is that the sole proprietor would gain nothing by attempting to file for bankruptcy in the business name.  An entrepreneur would access more comprehensive bankruptcy protection by filing a personal bankruptcy in his individual capacity in Chapter seven or thirteen.   Small business debts are frequently secured by the signature of the owner/proprietor.  A bankruptcy filed under the business name and not the name of the proprietor would afford the business owner with no protection from business creditors trying to collect on business debts secured by the owner.  The business and the proprietor would both need to file separate bankruptcies in order to access the greatest protection from creditors.  There are also certain business debts that a small business proprietor would always be personally liable for if the business fails such as employee wage debts and business related tax debts.  Filing for bankruptcy under a business name will not discharge proprietor business debt liability and will not stay the collection of proprietor business related debt as filing a personal bankrupcy would do. 

Corporation

State law will often automatically hold corporate directors and officers personally and strictly liable for certain corporate acts and debts regardless of whether or not the acts were carried out with due care.  Failure to pay employee wage withholding taxes to government agencies, payment of dividends to shareholders when the corporation is insolvent, failure to pay employee wages or contributions to pension or retirement programs are all examples of acts for which corporate directors and officers would be held personally liable regardless of a simoulaneous corporate declaration of bankruptcy.  Officers and directors that have personally guaranteed loans to provide for corporate lines of credit or corporate administration real estate leases are also often unprotected by a stay pursuant to a corporate bankruptcy filing from creditors seeking to collect on business debts. 

Getting Legal Help

Bankruptcy protection for small business and corporations and thier proprietor owners and corporate directors or officers can be extremely complicated procedures.  A bankruptcy attorney should be consulted in order to be fully aware of the affects of a business bankruptcy on the personal rights and interests of sole proprietors or corporate directors and officers. A bankruptcy attorney can review the financial circumstances of a business bankruptcy and provide advice on how to best protect the rights and interests of the business owners or corporate directors and officers.

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