Do You Need To File a Business or Personal Bankruptcy?

Businesses can be very successful. Other times businesses face severe financial difficulties.  If your business is failing, do you need to file a business or personal bankruptcy?

Business Debts Can “Get Personal”

With most small businesses, it is very common for the owners to make personal guarantees on the business’s debts.  Small businesses are not established sufficiently to obtain credit on their own. Usually the owners of the business find themselves in situations where lenders requires them to personally guarantee their debts.  

If a business fails, the only source of collection left are the owners of the business.  Creditors pursue the business owners as their primary source for collection.  Most business owners think that they can file bankruptcy on the business.   Usually this is insufficient to protect the owners:  the creditors will still come after them after the business bankruptcy is over.

Personal Bankruptcy May Be Required

Personal bankruptcy may be required to get relief from the debts of a failed business.  In fact, many times a business bankruptcy is unnecessary. If the business has no assets, it may be unnecessary to file bankruptcy on the business entity.  The business bankruptcy may send a clear message to all creditors that the business is now closed with no assets.  However, business bankruptcy may do little or nothing to relieve the personal obligations of the owners.

Many business owners only file personal bankruptcy after their business fails.  This will usually eliminate all of their debt responsibilities associated with the business.  The business owner then may only shut down the business entity with the IRS, the State Revenue office, and the Indiana Secretary of State.  The business owner would usually also send a notice of closing to all creditors.  Although there are noticeable advantages sometimes in filing business bankruptcy, it may be unnecessary to communicate the proper closing of the business to all creditors.