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James R. Jones, Attorney at Law.

What Types Of Debts Can Be Discharged In A Small Business Bankruptcy?

Typically, any unsecured debt can be discharged in a small business bankruptcy. Income taxes can be discharged after a 3-year waiting period. I recently helped a client discharge $250,000 in back income taxes. As long as your returns are filed timely, it’s a three-year rule. Real estate taxes, fines, and penalties paid to the government are not dischargeable. Liability for 940 or 941 taxes, which are self-employment taxes that a business pays, are also not dischargeable. Some loans, such as student loans, are not dischargeable. In almost every case, people have massive student loans. I am hoping Congress will do something about student loan debt to help people get back on their feet. Income taxes and student loans are the two biggest in bankruptcy cases. Otherwise, any unsecured debt like hospital bills, medical bills, credit cards, payday loans, and personal loans are dischargeable.

Can I Discharge An SBA Loan In A Bankruptcy?

An SBA loan can be discharged in a bankruptcy. For example, a client went to a couple of banks until he found one that was handing out money like it was free lunch. The client got a $250,000 SBA loan. The government actually guarantees SBA loans. So, in the event of a bankruptcy, the bank or the other lender can go to the government and notify them about the bankruptcy. The government pays or credits them up to 85% of what the loan balance would be. I always check to see whether it’s happened before. Most of these are uncollateralized, or at least, they are collateralized with whatever equipment the business has. As such, the client had given them a life insurance policy issued by his employer’s security. We discharged the loan, but SBA wouldn’t let go of the insurance policy. According to the law, they kind of have to release it, which is really strange.

If you have no debt, why would you need the security? It seems nonsensical to retain the collateral once the debt’s been discharged and inequitable. However, we didn’t litigate it. I’m not sure what the status of the case law is on that, but generally speaking, SBA loans are dischargeable.

Does An Automatic Stay Apply To Protect From Creditors In A Small Business Bankruptcy?

An automatic stay protects a small business during bankruptcy. The moment a bankruptcy is filed, the 362 injunction goes into effect. Depending on who the creditors are, some of them will still try to get around the injunction. However, I usually send them a nasty letter threatening them with contempt. The courts take a very strong view towards creditors that violate an automatic stay. I’ve seen cases where the collection agencies will do this as a business practice. The court, however, will spank them pretty hard. Therefore, an automatic stay stops creditors in their tracks, even the IRS.

Is It Better To File For Bankruptcy Or Should I Just Dissolve My Business?

Dissolving your business doesn’t absolve you of the debt. If you want a gap out of the debt, you’ll want to file a bankruptcy instead of dissolving the business. Additionally, if the business is an S corporation, you’ll have to go through the winding up procedures, which is a waste of money, particularly if the entity has no assets. Therefore, you definitely want to file a bankruptcy rather than dissolve a business. One of the things I will ask is if you are going to continue to operate the business. Depending on the answer, you’ll file either a Chapter 7, Chapter 11, or Chapter 13.

Do All Owners And Partners Need To Be Named In a Small Business Bankruptcy?

The naming of all owners and partners in a bankruptcy will depend on the nature of the entity. In an LLC, you’ll probably have to name everyone. If it is an S corp, it’s a case by case basis. It depends on the facts, but generally, in all small businesses, the owners usually guarantee the debt.

How Public Is My Small Business Bankruptcy Going To Be? Will Everyone I Do Business With Find Out?

In general, bankruptcies are public record. If you owe someone money, such as a creditor or vendor, they are going to be listed on the schedule. As such, they will get notice of the bankruptcy. Moreover, if somebody were to say that Joe filed bankruptcy, then that person can always access PACER. PACER is an electronic service that provides access to public records.

For more information on Dischargeable Debts In A Small Business Bankruptcy, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (713) 992-2039 today.

James R. Jones, Attorney at Law

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