Can you Discharge Business Debts in Bankruptcy?

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This is a common question – and the answer is yes.  You can discharge business loans in bankruptcy.  In fact, in some ways business debts are easier to discharge than personal debts.  The first issue to consider when you have problems with business debts is: must I keep the business running?  If the answer is no, then bankruptcy offers a simple exit strategy.  If you must keep the business in operation, then your only bankruptcy option is Chapter 11, which can be very helpful, but is fairly expensive and time-consuming.  The second issue is: Who is liable for the debt?  If the business is an state registered corporate entity (LLC or Corporation), then you must determine if you are co-signed for the business’ debts.  If you are, then a personal bankruptcy will remove your personal liability on those loans.  This would leave your creditors nothing to pursue for their debts other than the assets of the business itself, which are usually expended by the time you file your bankruptcy.  If your business is the only entity liable, then you are not personally liable for the debt (except in unusual circumstances like fraud) and can either let the creditors fight over the corporate corpse or file a business Chapter 7 to wrap it all up in an orderly fashion.

What about SBA loans?  They are dischargeable as well.  Unlike federal student loans, loans guaranteed or issued by the US Small Business Administration are not excepted from discharge.  They purpose of the program is to encourage entrepreneurial activity by providing credit where private lenders may be reluctant or too demanding of collateral.  As long as you did not pledge something like your home as collateral for an SBA loan, then you can safely discharge it like any other unsecured debt.

As in all matters of law your first course of action is to discuss your case with a local bankruptcy attorney.

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