Bankruptcy for a Business Owner: The special headaches.

“With Great Risk Comes Great Reward” – T. Jefferson
In order to succeed as a business person in this country individuals have to be willing to take a risk.  They put their heart, soles and wallets on the line.  However, not every business can succeed.  Even among those businesses that do succeed, there are often major hiccups in the owners personal finances along the way.  When a business owner files for personal bankruptcy they face special headaches that non-business owners don’t face.
Pay Stubs
When an employee of a company files personal bankruptcy, the trustee requests pay stubs, bank statements, tax returns and other financial documents.  These documents are usually pretty straight forward with the information the trustee is seeking right there for all to see.  However, business owners don’t typically receive pay stubs.  Even if a business owner chooses to receive a regular paycheck, the stubs are not telling the whole story.  They may also receive bonuses, profit sharing or simply draws that may not appear on the owners pay checks.  The owner’s income is often a complicated target that is hard to find and even more difficult to explain to a trustee who may never have run a business of their own.
Valuation
The value of a business is a moving target that is very difficult to nail down.  Assets, debts, income, depreciation all play into the amount that the business could sell for on the open market.  While the target is moving and difficult to determine, it is also potentially very important to the outcome of a business owners personal bankruptcy.  In a Chapter 7 bankruptcy the valuation of the business could determine whether or not the business owner is entitled to keep their business after filing.  In a Chapter 13 bankruptcy the valuation of the business is used to determine how much of the debtor’s unsecured debt must be repaid.  To make matters worse, neither your judge nor your bankruptcy trustee has any special training when it comes to business valuations.  Therefore, it is important to be well prepared so that your business valuation prevails.
Loans
It would be great as a business owner to have a company so steady that each month’s income was equal to or greater than the last.  However, as all business owners know, business is generally a series of ebbs and flows.  One month you are on top of the world and the next you are dead in the water.  Seasonal changes, road construction, economic slow downs and a plethora of other complications cause businesses head aches.  Often times business owners turn to small business loans, credit cards or other lines of credit to get through the slow months.  However, most of these sources of credit require that the business owner personally guarantee the loan.  When a business owner is in bankruptcy they are not allowed to take out most loans without court approval.  This makes pre-bankruptcy planning especially important for business owners.
Personal Guarantee
Most businesses are run by their owners as separate entities.  They may be a corporation, a LLC, a PLLC or one of many other various forms of entities.  However, because they are run as separate entities, these businesses are liable on the debts that they take out.  While the business owner is able to discharge their personal liability in bankruptcy, they cannot discharge the debts owed by the business itself.  This means that despite the bankruptcy, the owner will have to repay most business debts if they wish to continue operating the business.
These are just a few of the many problems that business owners face when they file for personal bankruptcy.  That is why it is imperative that business owners seek help from an attorney that has intimate knowledge of both bankruptcy rules and procedures as well as basic business practices.
Second Chance Legal Services offers free initial consultations.  Please call us at (248) 629-6367 to schedule your consultation today.