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Bankruptcy FAQ

Filing for bankruptcy because of business debt

On Behalf of | Oct 25, 2016 | Bankruptcy

Owning a business is not for the faint of heart. While starting a successful business from the ground up can be one of the most rewarding experiences in life, there are many, many businesses that fail every year in Louisiana.

Failed businesses can cause entrepreneurs to lose every penny to their names, and result in creditors threatening to take legal action.

In many cases, personal bankruptcy is the only option business owners have left. When considering bankruptcy, the type of debt a person carries — whether it is business debt or consumer debt — does make a difference.

Which type of bankruptcy applies to business debt?

It is possible for sole proprietors to file for either Chapter 7 or Chapter 13 personal bankruptcy to deal with business-related debts that they are personally liable for.

As you may already know, Chapter 7 involves liquidation. A person’s non-exempt property is sold off to pay back as many creditors as possible before the unsecured debt is wiped clean. A home, vehicle and other necessities are usually exempt from liquidation.

Chapter 13 involves reorganizing debt and establishing a repayment plan. Part or all of the debt is paid off over the course of three or five years, and no property is liquidated.

Does the Chapter 7 means test apply?

Normally, Chapter 7 bankruptcy requires passing the means test, which is aimed at preventing high-income debtors from qualifying. It typically requires that a debtor has little or no disposable income.

However, there is an exception to the means test for business-related debts, which results in some business owners, with too high of income to pass the means test, qualifying for Chapter 7 because the debts are primarily business related.

The first step that business owners considering bankruptcy should take is meeting with an experienced attorney in their area. Be sure to ask about the Chapter 7 means-test business-debt exception and whether it could apply.

Note: We are referring to business debt that the business owner is personally liable for. Chapter 11 bankruptcy often applies when the business itself — not the business owner — needs bankruptcy protection.