If your limited liability company (LLC) is facing financial issues due to business debts, filing for Chapter 7 bankruptcy can be a good option. When LLC files for bankruptcy, the business assets are liquidated by the trustee to repay the creditors. Filing a bankruptcy petition puts an automatic stay in place, and the business stops operating. The company’s assets are liquidated and distributed among creditors as per the U.S. Bankruptcy Code. All collection attempts made by the creditors are stopped with the automatic stay in place. Unfortunately, when any small business files for bankruptcy, no property exemptions or debt discharge is available to them. The latter is not required as the company ceases to exist after the liquidation of assets.
What happens to personal liabilities in business bankruptcy?
LCC is a business entity with a separate identity from its owners. Therefore, the company’s debts are not passed to them. However, there are certain circumstances where the individual may be personally liable for the LLC’s debts. These include:
- You gave a personal guarantee for a business debt which makes you personally liable for the debt even after getting business debt relief.
- You took business loans using your personal credit card.
- Unpaid sales tax, employment, and payroll taxes are debts you are personally liable for.
- Suppose your personal and business finances are not kept separate, or you failed to comply with the formalities of state law imposed on LLCs. In that case, you can be personally liable for the company’s debts.
- If creditors can prove that the LLC was formed to hide money from creditors, your personal assets can be in danger.
The creditors can come after your personal assets to recover the debt in such instances. If you face personal liability for your LLC debts, filing for personal bankruptcy is recommended. Partnerships are not considered separate legal entities, and therefore business owners can be held personally liable for the company’s debts. As a result, partnerships do not file for Chapter 7 business bankruptcy.
Options available for LLC
LLCs facing financial hardships can choose from other options available to them. These include out-of-court negotiations with the creditors for a payment plan that allows you to keep the LLC functional while paying them some amount of money. Another option available to them is filing for Chapter 11 bankruptcy, which allows them to keep the business running while reorganizing their debts. The owners can repay the company’s debts over a period of time without closing their company. However, the court and creditors need to approve of the plan for that to happen.
Filing for bankruptcy involves a bankruptcy filing fee which is $335. Apart from this, the lawyer charges an additional fee which depends on the number of creditors, the company’s sources of income, etc. Since bankruptcy has long-term legal and financial repercussions, it is important to seek the guidance of an experienced bankruptcy lawyer who can inform you about how the process can affect you and your business. If you are looking for an experienced lawyer, call 888-297-6203 to discuss your options while filing for bankruptcy with bankruptcy lawyers in Los Angeles.