If you’re a small business owner in New Jersey facing financial difficulties, you may be wondering if filing for bankruptcy can help discharge your business debts. However, what many business owners don’t realize is that, in many cases, simply filing bankruptcy for the business may not be enough to eliminate those debts. Instead, you might need to file for personal bankruptcy.
This is because many small business owners personally guarantee their business debts. In this blog post, we’ll explore why this can put you at risk of being personally liable, why filing for personal bankruptcy may be necessary, and what you need to know if you’re facing this situation in New Jersey.
Understanding Personal Guarantees on Business Debt
When starting or running a small business, it’s common for business owners to take on loans, leases, or credit lines to help cover operating expenses, purchase inventory, or finance equipment. However, for small businesses, lenders often require the business owner to sign a personal guarantee. This means that you, as the business owner, are personally responsible for repaying the debt if your business cannot.
What Is a Personal Guarantee?
A personal guarantee is a legally binding agreement in which you agree to be personally liable for the debts of your business. If the business defaults on its payments, creditors can pursue your personal assets, such as your home, bank accounts, or other property, to satisfy the debt.
Why a Business Bankruptcy May Not Be Enough
If your business is struggling and unable to pay its debts, you might consider filing for Chapter 7 or Chapter 11 bankruptcy for the business. However, it’s important to understand that filing bankruptcy for your business does not automatically protect you from personal liability if you’ve personally guaranteed those debts.
In New Jersey, if your business files for bankruptcy but you’ve signed personal guarantees, creditors can still sue you individually in state court to collect what is owed. This is why, in many cases, business owners find that they need to file for personal bankruptcy to fully discharge their obligations.
When to Consider Personal Bankruptcy
If your business debts are threatening your personal finances, filing for personal bankruptcy under Chapter 7 or Chapter 13 may be the best option. Here’s how these two types of bankruptcy work:
Chapter 7 Bankruptcy (Liquidation)
- Best for individuals with significant unsecured debts and limited income.
- If you qualify, Chapter 7 allows you to discharge most unsecured debts, including credit card debt, personal loans, and even business debts that were personally guaranteed.
- The process typically takes a few months and may require the liquidation of certain non-exempt assets to pay off creditors.
Chapter 13 Bankruptcy (Repayment Plan)
- Suitable for individuals with a steady income who want to reorganize their debts.
- Instead of liquidating assets, Chapter 13 allows you to create a repayment plan lasting 3 to 5 years to pay back a portion of your debts.
- At the end of the repayment period, any remaining eligible debts are discharged, including personally guaranteed business debts.
What Happens If You Don’t File Personal Bankruptcy?
If your business closes or files for bankruptcy without addressing your personal liability, creditors can pursue you directly. This often leads to lawsuits in New Jersey state courts, where creditors can obtain judgments against you. With a judgment, creditors can take further collection actions, including:
- Wage Garnishment: Deducting a portion of your income directly from your paycheck.
- Bank Account Levies: Freezing your bank accounts and taking funds to pay the debt.
- Property Liens: Placing a lien on your home or other real estate, which can complicate future sales or refinancing.
Filing for personal bankruptcy can put a stop to these actions by invoking the automatic stay, which halts all collection efforts while your bankruptcy case is pending.
