Can an Operator of an LLC Get a Discharge in a Bankruptcy?
Limited liability company operators can receive a discharge of some debt when declaring personal bankruptcy if they are also the company's owner. If the LLC declares bankruptcy, the trustee will discharge company debt; but, the operator does not receive protection from personal debt. If the operator personally guaranteed the loans, the creditor can seek payment from him if the trustee discharges the debt in the company's bankruptcy petition. Owners of a no-asset LLC can declare personal bankruptcy to receive a discharge of personally guaranteed loans but, if the company remains in business, creditors will continue to seek payment from the company.
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Bankruptcy Types
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As an individual, you can file Chapter 7 or Chapter 13 bankruptcy. LLCs can file for protection under Chapter 7 or Chapter 11. Filing for Chapter 7 relieves individuals of most debt but if the individual or company has assets, the trustee can sell the assets to repay as much debt as possible. A Chapter 13 allows an individual to create a three to five-year repayment plan to pay his obligations without losing his property. An LLC can file for Chapter 11 and undergo reorganization, but filing for Chapter 11 is costly and time consuming.
Consulting an Attorney
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It is essential that you consult an attorney before filing for any type of bankruptcy. An attorney who specializes in bankruptcy can advise you of the best option for you and your business. Many attorneys offer a free initial consultation that you can take advantage of to discuss your options. For the attorney to properly assess your situation, take and documentation of income, expenses and debt that you have concerning your personal and company finances. The attorney also requires your personal and company tax filings for at least three years and all of your financial statements. Once you decide on the type of bankruptcy that is best for you, your attorney will help you complete the bankruptcy schedules, advise you on any credit counseling requirements and file your paperwork with the bankruptcy court in your district.
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After Filing
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If you file for bankruptcy as an individual, you can continue to operate the LLC. However, if the LLC files for Chapter 7, you must close down the company. The company can continue operations if you file for Chapter 11, but you must work out a repayment plan with a creditor's committee. In a personal Chapter 13 filing, the trustee must approve any repayment plan. If you reaffirm any debts with the creditors, the trustee must approve the reaffirmation. Some creditors require that debtors sign new loan contracts to reaffirm their commitment to paying the debt.
Nondischarged Debt
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Bankruptcy does not discharge unpaid tax liabilities, support obligations or student-loan debt. These are priority debts and the trustee will ensure that you pay the taxing authority or lender. If you file for Chapter 7, you must arrange to pay with the owed department or lender if you do not have enough assets that the trustee can sell to satisfy your debt. Filing for Chapter 11 or 13 enables you to repay your debt through either the reorganization of your company's finances -- Chapter 11 -- or, in a Chapter 13, the repayment plan.
Future Credit
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Once you emerge from bankruptcy, it will be difficult to obtain new credit with a low interest rate. The bankruptcy will remain on your -- or your company's -- credit report for up to 10 years. Proper diligence in paying any current and future debt obligations is essential to rebuilding your credit rating to prebankruptcy levels.
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