How to Handle Business Debt if Your Business Fails

How to Handle Business Debt if Your Business Fails

What if the Company Fails and I Cannot Pay Back My Small Business Loan

Most companies will have some sort of debt whether they are startups or fully mature Fortune 500 businesses. However, what happens to that debt if your business fails? While you may be on the hook for some or all of that debt, it is also possible that your creditors simply don’t get paid. Let’s look at how it is decided whether or not you have to repay your debt after your business ceases to exist.

Did You Personally Guarantee the Debt?

If you took out a personal loan or line of credit to finance your company, you will be required to pay back that debt. For instance, if you decided to use a personal credit card or received a home equity loan to fund your business, you have to repay that money no matter what happens. This is because the loan was secured with personal collateral or required some sort of personal guarantee that you would repay it.

You May File For Bankruptcy

When a small business fails, its owner will generally file for Chapter 7 bankruptcy. This is a liquidation bankruptcy that involves selling off the company’s assets and paying creditors to the extent that those assets are worth. After the liquidation is concluded, the company simply goes away. While creditors cannot compel future payment, penalities could apply such as a hit to your personal credit score for up to a decade.

You Aren’t Responsible for Company Debts and Liabilities

In the event that you ran your company as a corporate entity, you are not responsible for any debts or liabilities incurred by the corporation. Instead, those debts simply go away and your creditors have to accept a portion of the balance owed or nothing at all depending on how much remains after liquidation. This is why many will argue that you should operate as a corporation or at least as an LLC.

What If You Have a Business Insurance Policy?

It may be a good idea to buy a business insurance policy. Such a policy may help you in the event that you are sued by a customer or are otherwise accused of an improper act. Insurance could also provide money to pay creditors in the event that your company fails. Instead of losing your home or car to satisfy debt that you have personally guaranteed, your insurance policy will pay off some or all of that debt for you.

How do You Decide Who to Pay?

Typically, secured creditors are the ones who get paid first while unsecured creditors get paid last. Employees and others who are owed money for services rendered may or may not get paid depending on how much money is left over after those with higher priority are taken care of. In some cases, you may decide to file for Chapter 11 bankruptcy, which enables you to create a custom repayment plan and decide who you pay based on negotiations with all creditors.

If you run a business that fails for any reason, your best option is to file for bankruptcy. You can get rid of personal and business debts at the same time, which may help you retain some property and cash to rebuild and move on with your life.