This is the next post in a series of articles discussing small business bankruptcies in Olympia or Tacoma, Washington. The previous post discussed the Chapter 11 bankruptcy process for small businesses. Chapter 11 restructuring allows a business to reorganize its debts and other obligations while continuing operations. This relief from creditors may provide the financial opportunity to rebuild a small business in the face of financial difficulties. This post will address another topic commonly involved in small business bankruptcies: the personal liability of business owners who have guaranteed company debt. If your business is considering bankruptcy, contact our office today to speak and an attorney.
Personal guarantees are not dismissed when a Washington company files Chapter 11 bankruptcy
Generally speaking, Washington owners of corporations or limited liability companies are not responsible for the debts of the business. It is not uncommon, however, for banks, landlords, or other creditors to require small business owners to personally guarantee the company’s debt as an additional form of security. When a company fails to pay its debt or seeks relief from the debt in bankruptcy, the individual who guaranteed the payment may be held personally responsible. Many guarantees specifically include the company’s bankruptcy as a triggering event to enforce a personal guarantee. The automatic stay that will protect the company after filing bankruptcy will not apply to the guarantor. This means that creditors may continue to pursue collection actions against the guarantor, including obtaining a judgment against them directly, putting their personal assets at risk. To protect one’s personal assets and finances, many guarantors file personal bankruptcy.
Deciding whether to file personal bankruptcy can be complicated since one’s personal assets will be impacted. In some cases, an owner may elect to repay a company debt rather than seeking bankruptcy protection. In other circumstances, bankruptcy may be the only option. Depending upon the financial situation of the guarantor, the person may choose between Chapter 7 and Chapter 13 bankruptcy. Under Chapter 7, certain of the debtor’s “nonexempt” assets are liquidated to help pay creditors. This could mean a guarantor may lose his home or other valuable property to cover a business-related expense. In Chapter 13 bankruptcy, on the other hand, an individual must repay a portion of their debts over a period of time, the balance of which may be discharged at the end of the process. Debtors are not generally required to liquidate assets in a Chapter 13 case, which may make it a more attractive option in certain circumstances. In either case, upon initiating a Petition for bankruptcy, creditors will be subject to the automatic stay and prohibited from attempting to collect the debt. A knowledgeable attorney can assist you in deciding how best to seek relief from a personal guarantee obligation.
An Olympia lawyer can explain a business owner’s personal bankruptcy options
Consider the following example. Two friends start a Washington limited liability company to operate a restaurant. Each owns fifty percent of the company. When they sign a five-year lease for space, the landlord requires each owner to sign a personal guarantee, promising to pay the obligations of the restaurant if the company defaults on the lease terms. After six months, the business is not doing well and can no longer afford to pay rent, vendors, or employees. The business itself files bankruptcy to restructure its debts and attempts to salvage the business. The two owners, however, are still on the hook for the lease obligations because they agreed to personally guarantee the arrangement, and the personal guarantee made the company filing for bankruptcy a triggering event. Pursuant to the lease and guarantee, either one of them is responsible to pay the entire remaining four years and six months of rent, an amount neither can afford. Each owner individually consults with an attorney to evaluate whether Chapter 7 or 13 personal bankruptcy is right for them. Because each owners’ individual assets and liabilities are different, the they may receive different advice as to whether or not to proceed with a personal bankruptcy. In either case, if their attorney recommends seeking bankruptcy protection, doing so promptly may preclude the landlord from taking personally damaging legal action against them.
If you need assistance with a small business or personal bankruptcy matter, contact our office today to speak with an Olympia attorney. We also serve the Thurston County cities of Lacey, Tumwater, and Yelm, the Pierce County cities of Tacoma, Puyallup, and Lakewood, the Lewis County cities of Centralia, and Chehalis, the King County cities of Seattle, Auburn, Bellevue, Burien, and Federal Way, as well as other areas in Washington, including Grays Harbor, Mason, Cowlitz, and Pacific Counties.