You may think you need a business bankruptcy when you really don’t.   You may need do a personal bankruptcy, instead.  And you might need to just dissolve your LLC or S corporation.

Most small business owners don’t like to hear they need to file a personal bankruptcy.  People know that Donald Trump has had three or four business bankruptcies and NEVER needed a personal bankruptcy.  Why does he get away each time?

One reason is Donald Trump has business lawyers who make sure he doesn’t put a personal guarantee on his business debts.  Most small business owners didn’t have expensive business lawyers–and most small business owners signed those personal guarantees!  Usually landlords, banks, yellow page reps, and suppliers make the small business owner sign a personal guarantee.  (Mine all did.)  Those personal guarantees then are the small business owner’s biggest problem. They will come after the small business owner–you–personally, for those debts.  Filing a bankruptcy for the business does not help with that.  Not at all.

Business owners who are personally liable for business debts and can’t pay, need to look into a personal bankruptcy.

Should there be a business bankruptcy, too?  It depends.

Is this a business like Donald Trump’s business, with seven casinos?  Is it a dentist with hundreds of thousands of dollars in equipment?  Or a factory, with dozens of people working on the production line.  Then the answer is, yes.  Those businesses probably need  a Chapter 11 business bankruptcy.  (I don’t do Chapter 11.  In Northern Virginia, you might want to talk to James Reynolds, or Daniel Press. )

If the business is one person, some tools, and a truck, then most likely there’s no need for a business bankruptcy. Or suppose the business is free lance photography, with camera equipment.  Or graphic design, with expensive computers.  Again, most likely there’s no need for a business bankruptcy.

And if the business has gone out of business completely, then there’s almost certainly no need to file a bankruptcy for that business.

(North Carolina lawyer Billy Brewer, one of the smartest people I know, says a bankruptcy for an out-of-business corporation like an expensive funeral for a ghost.   Since there’s no body, no grave site, and no mourners, what’s the point?)

Court records show where one of Northern Virginia’s leading business lawyers charged $2500 to do a Chapter 7 for an excavating business that had been closed for over a year.  (That lawyer probably thought he was cutting them a break, because that $2500 was low for the amount of paper work required.)

On the other hand, a business owner can close an out-of-business corporation in Virginia by filing two papers, each with a $10.00 filing fee.   That saves of a lot of time and $2480.00.

What papers?   They are the “articles of dissolution” and “articles of termination of corporate existence”.  Both forms can be found here.

If the business is set up as an LLC, there’s a solution that’s even cheaper.  The owner can file a “statement or resignation of registered agent of a limited liability company” found here–there’s no fee!–and then if no new registered agent is appointed, you’ll get a notice after thirty days and then automatic cancellation two months later.

The business can do this before or after the personal bankruptcy–but it’s often best to do it before.

Suppose the S corporation owns an F-350 truck, paid for, that’s used to bring tools and materials to job sites.  If the business files a Chapter 7 bankruptcy for the business corporation, the bankruptcy trustee will take and sell the truck.  Oops.  Now you are out of business.

If the owner files a Chapter 7 personal bankruptcy, the bankruptcy trustee will take over the corporation, and then sell the truck.  Same result.  No truck–no business.

Now suppose the owner files those two papers and closes the corporation.  Or that one paper to close the LLC.  Now the truck belongs to the owner, personally.  That’s a lot better.

Under Virginia law, a “poor debtor”–that’s a person–can protect from the bankruptcy trustee the motor vehicle, worth up to $6,000 and tools worth up to $10,000.   The F-350 is a vehicle, and it’s also a tool.  Now the owner can protect it because it belongs to a person, not the corporation or LLC.  The business owner gets to keep the truck.

And the owner, the person, can continue doing what the business did as an S corporation or LLC.  Painting, dry wall, lawn service, photography, whatever.

Then, if the business  accountant or business lawyer thinks the business should, after a year or so, the business can set up a new S corporation or LLC.

(Do not set up a new business immediately after the old one is dissolved.  Do not not go straight from Weed’s Lawn Service LLC to Weed’s Lawn Service, Inc.  Why not?  Under Virginia law, the new corporation or LLC would be liable for the debts of the old one, if it is a “mere continuation” of the old business.   You need to put some time and distance, before going back to a corporation or LLC.    But’s it’s ok to stay in business as a person.  And stay in business as a dba:  Robert Weed dba Weed’s Lawn Service.  Your personal bankruptcy protects you.)

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