A Chapter 7 “Straight Bankruptcy” Can . . . Help You Deal with Secured Debts from Your Closed Business

Chapter 7 puts you in the driver’s seat to either keep or surrender the collateral securing your business debts.

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As you close your business, you may have different intentions about what to do with the collateral securing any of your business loans and debts.

  • If the collateral consists of business assets you no longer need, your biggest concern is with avoiding or at least minimizing liability after you surrender that collateral.
  • If you need that collateral for your new employment or new self-employment, you hope to figure out a way–in the midst of all your financial pressures, to be able to keep paying for it.
  • If you had to sign over your personal assets as collateral for your business debts, you want to have sensible ways either to keep such collateral or surrender it, avoiding bad financial consequences either way.

A Chapter 7 bankruptcy filing will help with each of these.

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Surrendering Business Collateral

Regardless what kind of debt you may have that is secured by any business collateral, the odds are very high that if you were to surrender the collateral to the creditor you would still personally owe a large debt. Whether a simple business equipment or business vehicle purchase, the lease of a business premises secured by the business assets on site, or a business bank loan secured by virtually all assets of the business, the collateral’s value at surrender is almost never enough to pay off the entire debt. Furthermore, as you’ve likely learned, you are required to personally sign or guarantee almost all small business credit obligations; efforts to shield your personal liability behind a business or corporate name seldom work.

So it’s good to know that a Chapter 7 bankruptcy almost always (other than in situations of fraud) discharges (forever writes off) any “deficiency balance”—the amount that you would contractually owe after the surrendered collateral is sold and credited to the account.

Keeping Business Collateral

If you are personally liable on a debt with collateral you want to keep, generally the creditor will allow you to keep it as long as the account is current when your Chapter 7 bankruptcy case is filed (or else quickly brought current) and you agree to remain legally liable on the debt. You would likely have to “reaffirm” the debt—formally exclude the debt from the general discharge of your debts. Whether that is wise depends on the value of the collateral compared to the balance on the debt, the importance of the collateral to you, and your confidence in being able to pay off the debt.

A Chapter 7 bankruptcy will help you bring the account current and then to pay it off, since it discharges all or most of your other debts, enabling you to focus your financial resources on keeping the business collateral you need.

Surrendering or Keeping Personal Collateral

Earlier, when you initially entered into credit obligations on behalf of your business, the creditor may have insisted on securing the debt with your personal assets, such as your vehicle, boat, or even a second mortgage on your home.   After your business fails, your practical choices on such secured debts would be not very good. If you were willing to surrender the particular collateral, you would very likely owe a deficiency balance. So, in spite of having given up the collateral, you would still have to pay a part of the debt, and often a very large part of it. If you wanted to keep the personal collateral, you would have to catch up on your payments and then make those payments on time until you paid it off. But that would be either extremely difficult or impossible while burdened with all the rest of your business and personal debts.

But a Chapter 7 bankruptcy, as stated above, would enable you to surrender whatever collateral whose debt you felt was not worth paying for, and almost certainly (again, except in circumstances of fraud) without being required to pay any deficiency balance. And on debts with collateral you want to keep, you would much more likely be able to catch up with, make consistent payments on, and eventually pay off the secured debt if you are discharging your other debts through bankruptcy. 

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