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Does a small business failure equal personal bankruptcy?

When a small business fails, many owners are left wondering if they will have to declare personal bankruptcy to protect their assets. Struggling with debt is difficult, and it can be even more complicated when a business' expenses are getting out of hand.

Frequently, the largest cash outlay for a business is equipment and a point-of-sale system. These are generally obtained with a loan, and it's not unusual for a lender to ask for a personal guarantee. This is not always a requirement. If there wasn't a personal guarantee, it may not be necessary to file a personal bankruptcy. However, it is very important to make sure that personal assets such as bank accounts, cars or even a house weren't pledged as collateral, because the lender can come after those things after a business bankruptcy. In that case, it becomes necessary to protect personal assets by filing a Chapter 7 or 13 bankruptcy.

Often it is possible for the company that sold to resell it, thus lowering the amount the business owner owes by a significant amount. Sometimes it is possible to make repayment arrangements with the company for the deficiency amount, so it may be possible to avoid bankruptcy if the amount owed is reasonable.

If business debt has become overwhelming, it may be time to consult with a bankruptcy attorney. An attorney may review the terms of any loans made to the business and determine whether or not the business owner is personally liable for any of the debts. It may be possible to protect personal assets by negotiating a payment plan or going through the court system and filing for bankruptcy.

Source: Fox Business, "My Small Biz Failed. Should I File Bankruptcy?", Justin Harelik, July 31, 2013

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  • Oregon State bar
  • NACBA | National Association of Consumer Bankruptcy Attorneys
  • NACA | National Association of Consumer Advocates
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