Can You Discharge Business Credit Cards in Bankruptcy?

Business debt can be a great burden, particularly on small business owners. Business credit cards typically have higher limits and often are used to make much larger purchases, resulting in high debt balances. If you own a business and file bankruptcy, whether you can discharge the debt depends upon your personal liability. In either case, the business will still owe the debt, even if you personally do not.

Bankruptcy Discharge and Personal Liability

A bankruptcy discharge does not wipe out your debt. Rather, the discharge wipes out your legal obligation to repay the debt. The debt still exists, but your personal liability is gone. For example, if you have a credit card that you hold jointly with your spouse and you file bankruptcy, you are not legally obligated to repay the debt, but your spouse still will be obligated to repay the debt unless she files bankruptcy, too. Because the bankruptcy discharge is personal, you can only discharge debts on which you are personally liable.

Individual Bankruptcy and Personally Guaranteed Business Debt

If you have personally guaranteed your business debt, you can discharge your obligation to repay the debt in your bankruptcy. Business debts, including business credit cards, often are backed by personal guarantees. Many banks ask for a personal guarantee as a backup when they lend a business money. If the business does not pay, the bank can collect from the guarantor. Your credit agreement shows whether you personally guaranteed the debt. While your personal liability on the guaranteed debt is discharged in your bankruptcy, the debt still exists and your business still owes it.

Business Debt With No Personal Guaranty in Individual Bankruptcy

If you file a bankruptcy and your business has debt that you did not personally guarantee, the business still owes the debt, just as it would if you had personally guaranteed it. Your filing personal bankruptcy does not affect your business's liability on its debts; the only effect is on your liability.

Business Bankruptcy

If your business has debts it cannot manage, you can file a business bankruptcy under either Chapter 7 or Chapter 11. A Chapter 7 bankruptcy is a liquidation, and you should only file Chapter 7 for a business that is closing. Businesses do not receive a Chapter 7 discharge, but simply dissolve when the assets are sold. A Chapter 11 bankruptcy is a reorganization, which allows a business to renegotiate the terms of its debts and propose a plan to get up and running efficiently.

References

• Law.com: Legal Dictionary--Definition of Guarantee
• U.S. Courts: Bankruptcy Basics--Discharge in Bankruptcy
• American Bankruptcy Institute: U.S. Code, Title 11, Section 727(a)(1)
• American Bankruptcy Institute: U.S. Code, Title 11, Section 109(e)
• U.S. Courts: Bankruptcy Basics--Chapter 11, The Discharge