What happens to my business loan if I declare bankruptcy?
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UPDATED: Apr 10, 2013
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If you declare bankruptcy, your business loan does not have to be repaid by you. However, it must be repaid by your business, which is a separate legal entity.
Attorney and founder of LakeLaw, David P. Leibowitz, told loans.org that in the event of bankruptcy, lenders usually try to accelerate business financing in an attempt to reclaim their money. However, legal protections typically favor borrowers.
“If an individual files a bankruptcy case and has business loan debt, that debt typically will be discharged just like any other debt,” said Leibowitz.
Richard G. Gertler Esq., with Gertler Law Group LLC Attorneys At Law, told loans.org that lenders require personal guarantees from business owners.
That debt is discharged even when a borrower personally guaranteed the financing.
Richard G. Gertler Esq., with Gertler Law Group LLC Attorneys At Law, told loans.org that absent fraud or other prohibited conduct, the liability under a personal guaranty would be extinguished under Chapter 7 filings. The business itself though would remain liable for repayment of the business financing debt.
“If, after the liquidation of the collateral by the lender, the loan is not fully repaid, the lender may pursue other assets of the business, such as receivables, equipment, inventory, etc,” said Gertler. “If the business entity has closed down, and there are no assets, the lender will be unable to collect the balance of the loan.”
Gertler explained that when a borrower’s business becomes insolvent, the balance of their business loan is treated as unsecured debt. It is then paid on an equal basis to the other unsecured creditors. While many times lenders get nothing, in some circumstances they have recourse against the business owner under the personal guaranty.
Leibowitz said that the overwhelming number of cases are not business related. However, small businesses do sometimes fail, which in turn leads to bankruptcy.
Gertler advises business financing borrowers facing bankruptcy to get advice from attorneys and accountants who specialize in bankruptcy.
“Pre-bankruptcy planning can mean the difference from successfully emerging from a Chapter 11 with a reorganized business or the liquidation of a business,” said Gertler. “Many times, critical issues can be addressed and resolved which may eliminate the need to file bankruptcy.”
Ideally though, borrowers will be able to restructure their business in order to put preventative measures in place that will thwart the need to file in the future. You can click here to find additional resources on business loans and how they relate to bankruptcy.