I read that Business debt can't be discharged....

[aspenjim]

In this forum, I read business debt can't be discharged. I have a LLC doing business as a sub s corp in Colorado as an IT consultant.

Would someone please kindly elaborate on the statement that business debt can't be discharged?

I have about $35k of unsecured debt. At this point, all I do is make minimum payments ~$700/mo. I have good interest rates and good credit now. I just foresee never being able to get a handle on these.

I have about ~30k with capitalone that shows up on my personal credit report.

[HHM]

If you read that, then it is incorrect.

My sense is, you are misinterpreting...what you probably read is that a BUSINESS ENTITY cannot receive a discharge of its debt in chapter 7 bankruptcy. Keep in mind that a business entity (LLC, Corp, etc) is a separate legal entity than the individual owner. So, if the BUSINESS ENTITY files BK-7, it is simply liquidated and closed.

The Owner CAN file bankruptcy and discharge his/her personal liability on the business debt. Note, if the owner files bankruptcy and the business stays open, the BUSINESS ENTITY is still responsible for the debt even though the owner has discharged his personal liability on the debt.

A normal strategy in a situation like this (especially when the business is a personal services like yours) is to simply shut down the business entity, have you work as a soleprop during the pendancy of the BK, and then after the BK is over, you can do whatever you want as far as having another business entity for tax reasons.

I think you need to speak to an attorney at this point, and don't consult with some bargain basement BK firm, you need a higher end firm to navigate your case so it can be successful.

[MSbklawyer]

It's not that business debt can't be discharged. I think what you are reading is that in Chapter 7, a business does not get a discharge. But if an individual owes business debt, that individual's liability for the business debt can be discharged assuming, of course, that it's not an otherwise non-dischargeable debt.

The source for this is § 723 of the code, which says:

"The court shall grant the debtor a discharge, unless --

(1) the debtor is not an individual . . ."

[aspenjim]

I was going by what I read in the previous post...

(I can't post links yet)

and what another local greenhouse owner told me and a little that I read on the internet.

It seemed like a matter of fact to me.

MSBKlawyer... would you mind explaining in (more) layman's terms this.. "a business does not get a discharge. But if an individual owes business debt"

That may be really good news for me. My personal credit report shows the ~30k capitalone and not the ~ $5k from business cards (wells fargo and advanta). The bulk of the Cap 1 debt is from 2 Audi's I've purchased on the Cap 1 cards for business. I have no problem surrendering them if and when the time comes.

[HHM]

LOL,

How many people has the Greenhouse owner represented in bankruptcy?

okay...Let's say you have a Chase Business Card in the name of the Grow LLC. But, as with any small business credit, the individual owner has personally guaranteed the debt. The owner of Grow LLC (let's call him Joe Smoker), Joe, gets advice from an accountant that for tax reasons it is advantageous to create an LLC.

Joe goes out and charges $30K on the Chase Business card. Note, there are two legal entities responsible for that debt Grow LLC and Joe Smoker. If Grow LLC doesn't pay the debt, then Chase goes after Joe Smoker.


Scenario 1
Grow LLC, if it files BK, does not receive a discharge of the Chase Business Card; instead, the bankruptcy trustee simply liquidates the assets of Grow LLC, pays what can be paid and Grow LLC is simply shut down. If we stop there, Chase can now go after Joe Smoker for the debt because of the personal guarantee.

Scenario 2.
Joe Smoker files BK. Joe eliminates his personal guarantee of the debt owed to Chase Business. But Grow LLC, is still on the hook.

Scenario 3.
Grow LLC stops operating and goes out of business. Since there is no value in Grow LLC, there is nothing for Chase Business to go after, so Chase turns its attention to Joe Smoker. Joe files personal BK and discharges his personal guarantee toward Chase.
Net result, the "business debt" is effectively eliminated. Grow LLC no longer exists so there is nothing for Chase to go after and Joe Smoker had discharged his responsibility in BK for that Chase Business debt.

Does that make sense? It is not that "business debt" cannot be discharged, it is that a "business entity" cannot receive a discharge. Basically, the BK court does not allow businesses and business owners to have their cake and eat it too, you cannot file BK on a business to eliminate the debt and keep that business operating (note, there ARE strategies to accomplish that result, but they do not entail filing BK for the business entity). When a business entity files BK-7, it is liquidated and shut down.

[aspenjim]

I have a IT consulting business. The greenhouse owner (a fellow local busainessman) has $100k of secured debt and 3 greenhouses he can't keep all open. In passing, he said "even if I file BK, I still have to pay the debt". That was the first I had ever heard of that

I'm looking over my credit report and in the capitalone section it says...
"Business Credit Card (individual has primary responsibility)"

I'm not exactly sure what that means other than if the business closes or BK's, I am still responsible for the debt. I was planning on hanging on long enough to "milk" the depreciation of the cars (purchased for tax write-off's).

Okay, I reread your last post and it is clear to me.

I see you are in Colorado... your references to Joe Smoker and his greenhouse made me smile.

[maffy]

LOL,

How many people has the Greenhouse owner represented in bankruptcy?

okay...Let's say you have a Chase Business Card in the name of the Grow LLC. But, as with any small business credit, the individual owner has personally guaranteed the debt. The owner of Grow Inc (let's call him Joe Smoker), Joe, gets advice from an accountant that for tax reasons it is advantageous to create an LLC.

Joe goes out and charges $30K on the Chase Business card. Note, there are two legal entities responsible for that debt Grow LLC and Joe Smoker. If Grow LLC doesn't pay the debt, then Chase goes after Joe Smoker.


Scenario 1
Grow LLC, if it files BK, does not receive a discharge of the Chase Business Card; instead, the bankruptcy trustee simply liquidates the assets of Grow LLC, pays what can be paid and Grow LLC is simply shut down. If we stop there, Chase can now go after Joe Smoker for the debt because of the personal guarantee.

Scenario 2.
Joe Smoker files BK. Joe eliminates his personal guarantee of the debt owed to Chase Business. But Grow LLC, is still on the hook.

I know this is an older thread, but can you tell me does this also apply to a DBA (sole proprietorship)? I have some business cc's that I'm including. Would I be best to shut the business down and reapply for a new license after discharge?

[HHM]

I know this is an older thread, but can you tell me does this also apply to a DBA (sole proprietorship)? I have some business cc's that I'm including. Would I be best to shut the business down and reapply for a new license after discharge?

Not really. There is no legal distinction between the business operation and the business operator (you). You would just file a personal bankruptcy. What happens to the business operation will depend on the nature of the business and the exemptions available in your state.

A common example. Plumber. Primarily a personal services business, but the plumber has a bunch of tools and maybe a van he uses for the business. Assume plumber is sole prop. Plumber files BK, he can still operate as plumber, but he will need an exemption to protect the tools and the van (tools of trade exemption). The plumber will receive a discharge of the debt, clean the slate; but can still be a plumber.

[maffy]

A common example. Plumber. Primarily a personal services business, but the plumber has a bunch of tools and maybe a van he uses for the business. Assume plumber is sole prop. Plumber files BK, he can still operate as plumber, but he will need an exemption to protect the tools and the van (tools of trade exemption). The plumber will receive a discharge of the debt, clean the slate; but can still be a plumber.

Yes, as far as my DBA business goes, the tools of trade are exempt for my state, so don't think there will be any problems there. But trying to clarify (sorry if I'm not getting this..)

Continuing your example: "Joe Plumber DBA No more leaks for you" owes Chase Business Card 30K that is discharged in personal bankruptcy. Can Chase Business card come back later and sue "No more leaks for you" for the amount owned by the business and possibly go after his tools of trade or any further business property acquired after the bankruptcy is complete? Or is it cut and dry - Joe Plumber IS "No more leaks for you" and it ends there?

[HHM]

Yes, as far as my DBA business goes, the tools of trade are exempt for my state, so don't think there will be any problems there. But trying to clarify (sorry if I'm not getting this..)

Continuing your example: "Joe Plumber DBA No more leaks for you" owes Chase Business Card 30K that is discharged in personal bankruptcy. Can Chase Business card come back later and sue "No more leaks for you" for the amount owned by the business and possibly go after his tools of trade or any further business property acquired after the bankruptcy is complete? Or is it cut and dry - Joe Plumber IS "No more leaks for you" and it ends there?

Nope, Chase has no recourse. "Joe Plumber" is "No more leaks" and vice versa. Also, on your BK petition, you will put Joe Plumber, but you also put the trade name (it is the box just below the "Name of Debtor" on the voluntary petition (Form B1)), so Chase will be no notice that Joe Plumber and No More Leaks are one in the same and filing BK.

It is cut and dry, if the debtor's business is merely a sole prop., debt in the "trade name" is discharged and the bank has no recourse (barring some sort of fraud, of course).

[frogger]

Yes, as far as my DBA business goes, the tools of trade are exempt for my state, so don't think there will be any problems there. But trying to clarify (sorry if I'm not getting this..)

Continuing your example: "Joe Plumber DBA No more leaks for you" owes Chase Business Card 30K that is discharged in personal bankruptcy. Can Chase Business card come back later and sue "No more leaks for you" for the amount owned by the business and possibly go after his tools of trade or any further business property acquired after the bankruptcy is complete? Or is it cut and dry - Joe Plumber IS "No more leaks for you" and it ends there?

Go back and reread what HHM said again. If you are a DBA, you and the business are one and the same. Debt can be discharged, it is cut and dry, no one can come after any discharged debt.

[maffy]

Mine was actually filed a couple of days ago - just doing more research of course on this great site! Looking at a copy of my petition, my atty didn't list the business name on B1 - but it is included on my Schedule I, also on B7 as this is my only form of employment... haven't had notice of my 341 yet, do you think I should ask them to amend B1 to include it the business name, or is this more a technicality?

[maffy]

Go back and reread what HHM said again. If you are a DBA, you and the business are one and the same. Debt can be discharged, it is cut and dry, no one can come after any discharged debt.

Thanks Frogger, I'm getting it

[HHM]

Mine was actually filed a couple of days ago - just doing more research of course and this great site! Looking at a copy of my petition, my atty didn't list the business name on B1 - but it is included on my Schedule I, also on B7 as this is my only form of employment... haven't had notice of my 341 yet, do you think I should ask them to amend B1 to include it the business name, or is this more a technicality?

Doesn't really matter, more of a technicality. If your attorney needs to amend for other reasons, then make the change; but if no other changes are needed to the petition, no need to amend just to add the trade name on Form B1.

I understand the confusion in this area...not a problem. The best way to distinguish it is this (at least in my opinion)

Business Operation : this is what the business does (fix pipes, sell stuff, provide a service, whatever)
Business Owner/operator : self evident, the people that own/operate the business operation.
Business Entity : this is the legal form of the business (LLC, Corp, etc).

If the business is set up as an LLC or Corporation (whether S-Corp or C-Corp), then you have all three categories (operation, owner(s), and entity).
If the business is s Sole Prop, all you have is Operation and Owner/Operator (although 'owner' is a bit of a misnomer because in a sole prop, you don't own a business, so operator is the better term).

[maffy]

Thanks for explaining this in detail. Though I've been in business for 15 years, have never dealt with an issue such as this. I'm sure it will make it more clear for Aspenjim too, (thanks for starting this thread!).

Can't express my graditude to all of you who "help us" on this site!!! Now hoping for the BEST through my bk process, but trying to prepare for "what" could happen. Will keep you posted...