Many people consider the possibility of bankruptcy as a means of dealing not just with personal debt but also with debt that is a result of expenses accrued in past business ventures. Depending upon the corporate structure of the business venture in question, this debt may or may not be dischargeable through a personal Chapter 7 filing.
If the business the debtor was involved in was a sole proprietorship, the debt resulting from the business is treated as individual debt and is dischargeable through the individual’s personal Chapter 7 filing to the same extent as other, non-business related debts. If the business in question was a general partnership or other corporate form, such as an LLC, the debt is likely not dischargeable in the individual’s personal Chapter 7, particularly if, say, the business was a single-member LLC (or PLLC in Michigan), a corporate form which is not recognized by the IRS.
The reason for this, as anyone who has been in business knows, is that a corporation is a stand-alone legal entity, a separate person entirely from the individual or individuals running the business. Just as any individual filing for bankruptcy could not list and discharge debts for their uncle or a friend, individuals cannot list and discharge debts belonging to a corporation, even one which, like the single-member LLC, is not taxed separately by the IRS.
Thus, it is extremely important when listing your debts for your bankruptcy attorney to specifically designate any debts which may be business-related rather than personal. This does not necessarily mean that your attorney does not need to know that they exist. To the contrary, there are steps that a bankruptcy attorney must still take in reporting the debts to the trustee and the bankruptcy court to protect you from the possibility that creditors of the business will “pierce the corporate veil” to pursue you personally for the debts. In addition, if one business venture in an individual’s past has succeeded another, prior venture, there may be state laws regarding corporate successorship and liability that need to be taken into consideration.
If you are considering filing for bankruptcy and are concerned about the balance of personal and business debt that you are carrying, please contact me at jhilla@aronofflinnell.com or (248) 977-4182 to schedule a free, initial consultation so that we can discuss the best options for you.
Thanks to North Carolina attorney Adrian M. Lapas and South Carolina attorney Russell A. DeMott for providing information used in this article.
