Bankruptcy Lawyer Bryan W. Stone answers the question: “What is a small business bankruptcy ?”
The founder of the online media empire Gawker, Nick Denton, just filed for Chapter 11 bankruptcy protection. Denton joins a former editor of Gawker and the company itself in bankruptcy, a chain reaction that started when Gawker lost its fight against Hulk Hogan. The case brought by the former professional wrestler resulted in a massive $140 million judgment against Gawker and Denton. Though the company has said it intends to appeal the verdict, judges so far have refused to stay the decision meaning the money is owed and Hogan is free to begin seizing assets, not only of the company, but of Denton.
The reason that Denton is on the hook personally has to do with the structure of the judgment. The jury in Florida decided that Hogan was owed $140 million. Of this total, $15 million was specific to Gawker, $10 million was for Denton and $115 million was split between the two and a third defendant, a former editor of the website. This joint liability means that each is responsible for a huge sum of money that could not be easily repaid. As a result, Hogan is entitled to seize assets from the defendants in an attempt to protect his judgment and collect as much money as possible. To avoid the seizure, Denton had to file for bankruptcy protection.
Denton’s case is a good example of what can happen in some cases involving business debts. In cases where a business is behind on its bills, it is possible that creditors could go after the owner personally. The likelihood of this happening depends on a few factors, including the way your business is structured and whether you are personally liable for any of the debts.
If your business is set up as a sole proprietorship or a partnership, you and your business are essentially one and the same. Legally, your business is not its own entity, which means that you will be personally responsible for any and all debts your business amasses. That means that if your business isn’t able to pay its bills, then the creditors will assuredly come after you for the rest of the money. Just like with Nick Denton, they can try to seize your personal assets to pay the business debts.
For those who created a corporation or an LLC, you did so likely with one purpose in mind: to limit your personal liability in case something should go wrong. The good news is that, in theory, you should have no personal liability for the debts of your company. This means that creditors shouldn’t be able to come after you and seize assets. But, and there’s always a but with these things, there can be exceptions.
The personal liability shield of a corporation falls away if a business owner personally guarantees or agrees to be liable for certain debts. One way that commonly happens is if the owner signs a personal guarantee. This usually happens when a company is young or lacks sufficient assets or collateral of its own. Banks and other lenders want to be sure their money is safe and will insist that an owner sign so they have some way of collecting if things go wrong. The same thing happens if you agree to use your personal property as collateral or even if you are careless and sign a contract in your name and personal capacity rather than as a business owner. Liability protection can also be lost if you fail to keep your personal and business affairs separate, with creditors suing to pierce the corporate veil and come after you as an individual for your business’s debts.
If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.
About the Author
Kyle Frost joined Arnold & Smith, PLLC in 2013 where he focuses his practice on all aspects of civil litigation and bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.
Born and raised in upstate New York, Mr. Frost attended the University at Albany on a Presidential Scholarship, graduating magna cum laude with a double major in Political Science and Sociology. He went on to attended Wake Forest University School of Law in Winston Salem, North Carolina.
Following college, Mr. Frost spent over a year teaching English in South Korea. He worked in a private school in Seoul developing curriculum, English programs, and educating both children and adults that were interested in learning a new language.
In his spare time, Mr. Frost enjoys homebrewing, fishing, and travelling.
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