What Happens to My Business’s Debts If They’re Not Discharged During Bankruptcy?

 Filing for bankruptcy provides businesses with an opportunity to resolve outstanding debts and either liquidate assets or reorganize their finances. One of the most critical aspects of the bankruptcy process is understanding how various debts are handled. Some debts may be discharged, meaning they are wiped out and no longer owed. However, not all debts are dischargeable, and it’s essential to understand what happens to those that remain.

In this blog, we will explore the different outcomes for business debts that are not discharged during bankruptcy, the potential consequences, and strategies for handling these debts.

1. Understanding Dischargeable vs. Non-Dischargeable Debts

Before diving into what happens to debts that aren’t discharged, it’s important to understand the distinction between dischargeable and non-dischargeable debts.

Dischargeable Debts

Dischargeable debts are those that can be wiped out through the bankruptcy process. This means that once the bankruptcy proceedings are concluded, the business will no longer be responsible for repaying them. In general, dischargeable debts include:

• Unsecured credit card debt
• Medical bills
• Unsecured loans
• Some types of business loans (if they do not have collateral attached)

Non-Dischargeable Debts

Non-dischargeable debts, on the other hand, cannot be eliminated in bankruptcy. These obligations remain even after the bankruptcy process is complete. Common examples of non-dischargeable debts include:

• Taxes: Certain tax debts, such as payroll taxes and income taxes that have been due for a certain period, may not be discharged in bankruptcy.
• Child and spousal support: Court-ordered child support or alimony payments are not dischargeable.
• Student loans: In most cases, student loans are not discharged unless you can prove undue hardship.
• Debts arising from fraud or criminal activity: If a debt was incurred through fraudulent means, it is not dischargeable.
• Debts secured by collateral: For example, if your business has a loan backed by collateral (such as real estate or equipment), and the debt isn’t paid off, the lender may seize the collateral even after the bankruptcy process.

2. What Happens to Non-Dischargeable Debts in Bankruptcy?

When certain debts aren’t discharged during bankruptcy, they don’t simply vanish. Your business will still be responsible for paying them after the bankruptcy proceedings are over. Here's how different scenarios could unfold for non-dischargeable debts:

Chapter 7 Bankruptcy

Chapter 7 bankruptcy involves the liquidation of a business’s assets to repay creditors. However, if some of your business’s debts are not dischargeable, they will remain in place after the liquidation. The following could happen:

• Secured Debts: If you have non-dischargeable secured debts (e.g., a loan for equipment or property), the creditor has the right to seize the collateral tied to the debt. Even though the business is being liquidated, the creditor will still attempt to recover the value of the collateral.
• Priority Debts: Some debts, such as unpaid wages or certain taxes, are considered priority debts. These must be repaid before other creditors can receive anything. If there’s not enough to cover priority debts after liquidation, they may not be fully satisfied, but the business will still be legally responsible for any remaining balance.
• Remaining Liabilities: Once your business assets are liquidated, any remaining non-dischargeable debts (e.g., some tax debts) will remain and must be repaid. In this case, the business owner may need to negotiate with creditors for additional terms, or the debts could be paid off via other means outside of bankruptcy.

Chapter 11 Bankruptcy

In Chapter 11, a business typically reorganizes rather than liquidates. The debts are often restructured, and the company continues operations under a new payment plan. Here’s how non-dischargeable debts might be handled:

• Restructuring Non-Dischargeable Debts: In Chapter 11, you may not be able to discharge debts like taxes or child support, but you may be able to negotiate more favorable repayment terms with creditors. For example, instead of paying the debt in full upfront, you may be able to extend the repayment period or reduce the amount owed.
• Priority Debts: Just like in Chapter 7, certain priority debts must be paid first. These debts may be restructured as part of the reorganization process, but the obligation to pay them remains.
• Ongoing Payments: If the business owes non-dischargeable debts, you will still need to make payments toward those debts during and after the Chapter 11 reorganization process. If the business is successful in its reorganization plan, it will eventually have the financial stability to meet these obligations.

3. Post-Bankruptcy: What Happens to the Remaining Debts?

Once your bankruptcy process concludes, and if there are still outstanding non-dischargeable debts, you’ll need to determine how to manage them moving forward. This could involve:

Payment Plans and Negotiation

For many businesses, negotiating with creditors is a key strategy after bankruptcy. If the business is still operating, you may be able to arrange new payment terms or even a settlement that reduces the overall amount owed. Some creditors might be willing to work with you to help get paid over time instead of forcing immediate repayment.

• Tax Debts: With tax debts, many businesses can negotiate payment plans with the IRS or other taxing authorities. If the debt is particularly large, the IRS may agree to extend the payment period or offer a settlement for a lower amount.
• Secured Creditors: For debts tied to collateral, you may negotiate with secured creditors to try and reach an agreement on how to handle the outstanding balance. This could include offering to keep paying the debt under modified terms or surrendering the collateral to settle the debt.

Personal Liability for Business Debts

In some cases, business owners could be personally liable for non-dischargeable debts. For instance, if you personally guaranteed certain loans, you may still be responsible for repaying those debts even if the business itself cannot discharge them. This is particularly common with small businesses, such as sole proprietorships or partnerships, where the line between personal and business finances is less distinct.

Potential Future Bankruptcy Filings

If your business continues to struggle with non-dischargeable debts, it may eventually face the possibility of another bankruptcy filing. However, keep in mind that it is difficult to file for bankruptcy multiple times. If a business owner has filed for bankruptcy in the past and received a discharge, they may have to wait a few years before filing again.

4. Impact on Business Operations and Credit

Non-dischargeable debts can affect the ongoing operations of your business. For example:

• Cash Flow Impact: Ongoing repayment of non-dischargeable debts can restrict cash flow and limit the ability to reinvest in the business or pay employees.
• Business Credit: Businesses that have non-dischargeable debts may find it difficult to rebuild credit after bankruptcy, as creditors are still owed money. This can make securing financing, obtaining favorable credit terms, or expanding operations more challenging.

5. Long-Term Strategies for Dealing with Non-Dischargeable Debts

After bankruptcy, businesses with non-dischargeable debts need to develop a long-term strategy to manage and eliminate those liabilities. Some effective approaches include:

• Debt Settlement: Negotiating directly with creditors for reduced debt amounts or new terms.
• Refinancing: Refinancing existing loans to extend the payment period or lower interest rates.
• Strategic Partnerships: Working with financial advisors or consultants to form strategic partnerships that can help generate more revenue and provide additional resources to repay debts.

Conclusion

While bankruptcy can offer businesses much-needed relief from overwhelming debt, not all debts will be discharged in the process. Non-dischargeable debts—such as certain tax obligations, child support, and secured debts—will remain after bankruptcy proceedings are completed. These debts must still be repaid, and businesses will need to develop a strategy to handle them moving forward.

For many businesses, negotiating with creditors, forming payment plans, or even exploring refinancing options are essential steps for managing non-dischargeable debts. If your business continues to struggle, seeking professional advice and considering long-term financial restructuring may be necessary to ensure the company’s survival.