Your Business Debts Can Become Your Debts

Why Creditor Challenges Occur After You Close Your Business

  1. In the case of a business closing due to bankruptcy, the sum of debt owed is usually larger than when a normal person files bankruptcy. Therefore, challenging is much more attractive to the creditor.
  2. Usually with business, the debtor-creditor relationships are more intimate. When the business fails, there is a lot more at stake and the creditors are usually personally hurt. Imagine former business partners who might be accusing each other that he or she ruined the business. Another example would be between the business owner and a primary investor who believes that the business owner mismanaged the invested money. Our last example is the relationship between the contract buyer of a business and the seller. The buyer might feel like the seller exaggerated the profitability of the business to be sold. Under these circumstances, these creditors are more likely to want to dispute the discharge of their debts.
  3. When a business is failing, more often than not, the business owner may make questionable decisions in order to keep their business going. This exposes the business owners to objections about fraud and so on.

Usually in these cases, the creditor is often aware of the business owner’s questionable decisions and therefore they have the legal grounds necessary to object to the discharge of their debts.

Objections to Discharge Still Few and Far Between

While we mentioned the reasons above why a creditor might try to attack a former business owner, it still does not occur as frequently as you might think. You might ask why? Here are some reasons:

  1. The legal grounds are quite narrow for the creditor to challenge the business owner. In order to challenge the discharge of debt, a creditor must prove that the debtor engaged in behavior that justifies challenging the discharge of debt. This includes (but is not limited to): fraud in incurring debt, embezzlement, larceny, fraud as a fiduciary, or intentional and malicious injury to property. Because this behavior is not easy to prove, the creditors do not tend to challenge unless they have strong proof.
  2. In a bankruptcy case, the debtor files specific papers that contain extensive information about his or her finances. This is done under oath. The business owner is then questioned extensively by creditors about the information on the documents and anything else they deem relevant to the discharge of his or her debts. If the information on these documents or from questioning reveals that the debtor really has no assets worth pursing, a shrewd and rational creditor will usually resolve to not throw good money away and pursue an objection.

In conclusion, there are two opposing tendencies in a closed-business bankruptcy. Challenges to discharge are more likely in the case of close relationships between creditor and debtor. However, these challenges are usually still rare because of the narrow legal grounds it takes to raise an objection. An astute bankruptcy attorney will advise you on this, prepare your bankruptcy paperwork to discourage these types of objections and will help derail any objections if any are brought up.