Small business fails: File bankruptcy?


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Dear Bankruptcy Adviser,
I closed my small business about five months ago and am currently in about $25,000 to $30,000 worth of debt. I owe money to a leasing agency for my equipment, my point-of-sale system and about $2,000 on a business credit card. Can I file Chapter 7 bankruptcy to relieve me from these debts?
— John

Dear John,
First, I have to say congratulations. Not because your business failed, but because you tried. I hope that your entrepreneurial spirit remains even if you end up filing bankruptcy. Don’t beat yourself up for failing, just learn and try again.

Second, you need to find out what you ultimately owe for the leasing equipment and the point-of-sale system. The lenders might be able to take the property, resell the equipment and reduce the outstanding loan balance. Don’t file without knowing your outstanding liability. It could be much less than you list above.

Third, you must confirm whether you personally guaranteed these loans. A personal guarantee means the lender has the right to the assets of the business and of the individual business owner should the owner default, but this is not always a loan requirement. I’ll assume you did because most businesses start with little to no assets.

Quite often, a client will tell me he or she wants to file bankruptcy for the business only, but not a personal bankruptcy. Through the consultation, I am able to confirm that the client pledged his or her personal assets as collateral for the business loan. Even if the business filed bankruptcy, the creditor can still come after personal assets such as cars, checking or savings accounts, and even a home.

For example, the lender may give equipment for business use, but will require that a lien be placed on your primary residence as security for that loan. This is a very common loan requirement through the Small Business Administration. The lender gives money to start the business, but requires the business owner to be on the hook personally if the business fails.

In your case, your debt consists of mainly business equipment. If you personally guaranteed those loans, you may need to file a personal bankruptcy to protect yourself. Before making that decision, you need to try and sell the equipment or give the equipment back immediately so the lender can try to resell it.

Reselling the property will lower your outstanding liability. The remaining balance, called a deficiency balance, will be your responsibility. You might be able to repay that debt directly to the lender rather than file bankruptcy.

Don’t just assume bankruptcy is your only option. With some figuring, you might be able to protect your credit, settle these accounts and start planning for your next business venture.

Good luck!

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