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Defaulting on Business Purchase Loan

By Nicholas Ortiz, Boston Bankruptcy Attorney

I’ve been hearing from more and more people who have purchased small businesses on an installment basis from a previous owner and are now struggling to make the payments because of the downturn in the economy. What should you know and do if you are in this situation?
First, it makes sense to try to renegotiate. This is always tough, and the person who sold you the business may be intractable, but you should definitely try it. The unique circumstances of the deal will dictate the bargaining power of each party.
The chief threat you have is to shut down and declare personal bankruptcy. Your personal guarantee of the business loan will be discharged by the court, and the previous business owner will be left with the option of reclaiming a dying business that he or she wanted out of anyway. Note: it is very, very important to preserve business assets if you default, especially if the seller retained a lien on the assets of the business. Selling equipment subject to a lien out the back door and pocketing the cash will create serious problems for you in or out of bankruptcy.
Of course, bankruptcy as a threat and option will depend on your overall situation. If you have significant assets or pledged personal assets as collateral as part of the business purchase, bankruptcy may not be advisable. However, special bankruptcy rules make it easier to qualify for Chapter 7 bankruptcy for individuals who have primarily business debts, even if they have higher income, but not all business owners driven in bankruptcy due to business debt will be in this situation.
There are many complicated issues involved in winding down a business subject to a loan. It is best to see a lawyer as soon as possible if you are facing this situation.

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Full post as published by Bankruptcy Law Network on December 23, 2010 (boomark / email).