Can I walk away from debt through bankruptcy as a small business owner?


I'm a small business owner. I was hit hard by the recession, since I'd invested in new equipment right before the economy tanked and my sales went into the toilet. I'm stuck with a fully-maxed out $75,000 line of credit that the business can't pay. I also owe on business credit cards, and owe more money to some vendors. Since these are business debts, can I walk away from the business and the debt?


The answer, like the answer to many things, is "it depends." First, you don't mention you type of business organization or structure. If you're a sole proprietor, then there is no separate business—you are the business and vice versa, which means that the business's debt is your debt. There's no walking away from business debt for sole proprietors.

If instead your business is an LLC or a corporation, you may be able to walk away from the business and the debt. However, the critical word is "may"—because if you personally guaranteed any debt (as if often the case with small business lines of credit), you'll still have to pay. Business credit cards are also often the responsibility of the individuals who them as well.

Much better would be to explore business debt reduction or business debt settlement as options. In debt reduction, you negotiate with creditors to forgive part of your debt, to make it more manageable. In debt settlement, you settle a debt in full with a partial payment. Either way, it requires creditor agreement, so it's far from a given; but if successful, may let you work your way out from under debt. Other options you may need to consider include bankruptcy, whether business and/or personal.

An attorney experienced with helping small businesses and their owners deal with debt can assist you in choosing the right option for your situation, as well as in negotiating with creditors and reviewing or drafting any necessary agreements.

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