Closing your small business may have felt like the end of a difficult chapter. But if the business credit card bill or loan payment still arrives each month, is the financial burden really over?
Personal bankruptcy may still be available if those payments now compete with your mortgage and household expenses. Whether business debt can be included in your bankruptcy will depend in part on whether you remain legally responsible for it.
Which business debts could remain?
Even after your business closes, some debts may remain connected to you instead of the business itself. Whether that happens can depend on your business structure and the agreements you signed. The following types of debt commonly raise questions about personal responsibility:
- Personally guaranteed loans: You may remain responsible if you agreed to repay the loan when the business could not.
- Sole proprietorship debts: These generally belong to you because the law does not treat the business as a separate legal entity.
- Business credit cards: Your responsibility can depend on the account agreement and who agreed to repay the balance.
- Certain tax debts: Bankruptcy rules treat some tax obligations differently from other debts.
- Separate business entity debts: These do not automatically become your personal obligations simply because you owned the company.
Loan agreements, account contracts and personal guarantees can help establish who owes each debt. Knowing which obligations are legally yours can make it easier to understand how bankruptcy may apply to your situation.
Which type of bankruptcy could apply?
Once you know which debts you remain responsible for, the next question is which type of bankruptcy may apply. Chapter 7 may discharge many qualifying debts, subject to income rules and other requirements. Chapter 13 allows eligible individuals with regular income to repay certain debts through a plan that generally lasts three to five years.
If you returned to steady work after closing your business, Chapter 13 may be an option if old business debt continues to compete with your mortgage and household expenses. Your income, debts and personal responsibility for those obligations can affect which chapter is available.
When business debt follows you home
Closing your business does not always end its financial impact. If you remain personally responsible for certain debts, those payments can continue to compete with your mortgage, car payment and other household expenses long after the business closes.
Knowing which debts you legally owe can give you a clearer picture of your financial situation. It can also help you better understand how bankruptcy may apply to debt left behind after your business closed.