Small / Closely held Corporate Bankruptcy and Personal Guarantees
In this continuing declining economy, our office is approached frequently by the small business owner. The owners of America’s small businesses are under the same ‘big’ company financial pressures. Oftentimes the pressure for the small businessman is higher, if that can be believed, due to the nature of the small business. A large corporation has a fiduciary duty to it’s investors, but in the end, if the big corporation fails, the investors lose, not the principals of the big corporation. At least, not unless they are heavily invested in the failing concern.
In contrast, the small business owner has everything to lose. They are 100% invested, so to speak. Sometimes literally blood, sweat and tears go into the dream of owning one’s own business. Frequently, what also comes with the dream is a mountain of debt. Some small businesses are funded by SBA loans, some by home equity loans, some by the use of credit card, some by retirement draws and savings. Many are funded with a combination of the above. For those businesses lucky enough to carry debt in the business name, usually there is a personal guarantee of the owner, resulting in potentially huge personal debt.
When the small business fails, or more accurately, the receipts for the small business no longer cover the debt load, clients will come to see a bankruptcy attorney. One of the first questions will be whether and how the bankruptcy will affect the ongoing business. Many of our clients are under the impression that if they have incorporated, the business will be left out of the bankruptcy process. While it is true that we normally counsel an individual to file, rather than the closely held corporation, the business, as an asset, will still come into the personal bankruptcy and will potentially be at risk. Client lists, commission income, accounts receivables, good will, leaseholds, and hard assets may still result in the closely held corporation becoming an asset to be liquidated in the personal bankruptcy filing.
So, while America’s small business owners may choose to file a personal bankruptcy to wipe out the debt used to fund the small business, such debt including the personal guarantees, this benefit must be weighed against the possible liquidation value of the small business, itself. As always, consult a qualified bankruptcy attorney to make an informed decision regarding this difficult choice file the personal bankruptcy.
John C. Colwell, San Diego Bankruptcy Attorney
