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Navigating Business Debt After the Owner’s Personal Bankruptcy Filing


Navigating Business Debt After the Owner’s Personal Bankruptcy Filing

Filing for personal bankruptcy can provide much-needed relief for individuals overwhelmed with debt. But what happens if you own a business? Can filing personal bankruptcy protect your business assets too?

Unfortunately, the answer is usually no. Personal and business finances are viewed as separate by the courts—so your personal bankruptcy won’t automatically protect your business assets or stop lawsuits against your company.

This article covers what business owners need to know about managing company debt after filing personal bankruptcy. We’ll look at how your business structure affects things, alternatives like Chapter 11, and strategies to limit business liability after bankruptcy.

How Business Structures Impact Bankruptcy

The type of legal structure your business uses will impact how much protection it gets from your personal bankruptcy filing. Here’s a quick rundown:

Sole Proprietorships

If you’re a sole proprietor, your business assets and liabilities aren’t considered separate from your personal ones. So filing Chapter 7 or Chapter 13 bankruptcy would liquidate business assets or put them under court protection.

This can be a good thing if you need to close up shop. But it also means creditors can’t go after business assets separately if you want to keep operating.


Partnership assets are normally owned jointly by partners, so they can be impacted by a partner’s personal bankruptcy. The partner’s ownership share could potentially be liquidated or put under court protection during bankruptcy proceedings.

But partnership assets aren’t automatically part of an individual partner’s bankruptcy estate. The trustee would need to bring them in, which doesn’t always happen. Lawsuits against the partnership may also still be allowed after one partner’s bankruptcy.

Corporations and LLCs

If your business is structured as a corporation or LLC, it’s considered a totally separate legal entity from yourself personally. So your personal bankruptcy filing would have little effect on the company’s assets or debts.

Creditors can still sue your business for payment, pursue foreclosure of company property, etc. And unless special arrangements are made, the bankruptcy trustee will likely try to liquidate your ownership shares to repay creditors.

So while corporations and LLCs have liability protections in general, they don’t get too much benefit from your personal bankruptcy case.

Using Chapter 11 Bankruptcy for Businesses

Since most business structures don’t get automatic protection from an owner’s personal bankruptcy, you may need to file a separate Chapter 11 bankruptcy for the company itself.

Chapter 11 allows businesses to restructure debts while continuing to operate. It imposes an automatic stay on collections and lawsuits, lets you catch up on secured debts, and negotiate a repayment plan for unsecured debts.

The process is complex though. You’ll need an attorney familiar with Chapter 11, and it can be expensive. There are also strict eligibility requirements—your business needs regular income and less than $2,725,625 in secured and unsecured debts to qualify.

For smaller businesses that don’t meet these requirements, filing personal bankruptcy first may make the most sense. Then work with creditors individually to manage remaining company debts.

Limiting Business Liability After Personal Bankruptcy

While your personal bankruptcy filing may not legally protect business assets, there are still things you can do to distance your company financially:

  • Shift ownership before filing – Transferring some or all ownership shares to a spouse or children before bankruptcy can help shield the business. Consult an attorney to ensure it’s done legally.
  • Separate finances – Avoid mingling personal and business finances as much as possible. Have the company pay you a salary rather than taking owner draws. Also be diligent about recording capital investments you make into the business.
  • Get liability insurance – Make sure the company has adequate insurance to cover potential lawsuits, property damage, and other liabilities. This will help fill gaps if the business is sued for debts you discharged personally.
  • Change management – Legally turning over control of the company to other owners, managers, or employees may also help create distance. Limit your roles to passive investor or advisor only.
  • Consult an attorney – Discuss your situation with a business lawyer. They can review your company structure, debts, and bankruptcy case to identify any other vulnerabilities and strategies to protect the business.

Dealing With Specific Debts After Bankruptcy

Certain kinds of business debts may still pose risks even after your personal bankruptcy case:

Secured Debts

Filing bankruptcy usually doesn’t eliminate secured debts—things like business loans or equipment leases where the creditor can seize collateral. You’ll need to continue making payments and stay current on these obligations. Otherwise, creditors can still repossess assets or pursue other legal action against the company itself.

Personal Guarantees

If you personally guaranteed any business loans or debts—signed an agreement making yourself liable if the company defaults—these may not be discharged by your bankruptcy either. Creditors can still come after you personally for payment if the business can’t pay.


While personal income taxes are dischargeable, business-related taxes usually aren’t. This includes payroll taxes, sales taxes, excise taxes, and certain other levies. The IRS and state tax agencies can still pursue collection against your company post-bankruptcy.

Non-Dischargeable Debts

Certain other business debts like fraud judgments, government fines, or penalties may be non-dischargeable too. Consult your attorney about any questionable obligations.

The key is being aware of debts your business still faces and managing them carefully to avoid default. Communicate with creditors and negotiate alternative payment plans if possible.

Making the Most of Your Fresh Start

While separating your personal and business finances during and after bankruptcy takes work, it’s often worth it. You can get the fresh start you need without losing your business in the process.

Just be sure to plan carefully and get legal advice before filing. An experienced bankruptcy attorney can help devise the best strategies to protect your company while relieving your personal debt burden.

With some diligence—and the protections bankruptcy provides from personal creditors—you can put this difficult chapter behind you and focus on rebuilding for the future. Both personally and as a business owner.

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