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Bankruptcy protects those who own failed businesses

On Behalf of | Dec 9, 2022 | Bankruptcy

Maybe you were the first person in Alaska to buy into a particular popular franchise, but locals seemingly have zero interest in patronizing your new business. Maybe the company you started was successful for years before a lawsuit left the organization with a judgment it had no viable means of repaying.

There are countless reasons why a business owner may decide that it is time to throw in the towel and dissolve the organization that they have committed much of their time and energy to develop. Unfortunately, even the closure of the business will come with some degree of risk for the owner of the company. You can potentially minimize your risk for financial liability when closing a business by filing business bankruptcy to discharge any outstanding company debts.

Why business debts could affect your personal finances

In theory, a business is a separate legal entity from you as an individual. In practice, the people who start or operate companies frequently have liability for the company’s obligations if the business itself is unable to meet them.

For example, if you created an LLC for your home repair business, in theory you don’t have any personal responsibility for judgments against the business or debts it has not paid at the time that you close the company. However, even seemingly minor financial mistakes early in the business development process my sources vulnerable. Creditors and those with a judgment against your business could ask the courts to pierce the corporate veil, which is a way of saying they will ask a judge to hold you as the owner personally accountable for the business’s financial obligations.

Bankruptcy protects owners by granting a discharge

Successful business bankruptcy proceedings will result in a discharge of unsecured debts. A Chapter 7 bankruptcy can lead to a relatively quick discharge of your debts. Before the courts discharge your organization’s debts, the trustee for your case will sell business assets and distribute the proceeds from those sales to the creditors subject to the discharge in order of priority.

Whatever remaining amounts go unpaid will typically be eligible for a discharge and will therefore not become your responsibility later. Pursuing a business bankruptcy can help those who want to run from a feeling or struggling business.