Bankruptcy & Business Owners
What if you own a small business, but are considering a personal bankruptcy?
A common question that I hear often is “will my personal bankruptcy affect my business?” To some extent, yes, however, to what extent is dependent on several factors.
First, the structure of your business will play a large role. For example, if you are filed as a sole proprietor, then you are actually your business. This means that your “business” assets can generally be considered personal assets, and therefore, subject to be used to settle your debts.
If, however, you are in a partnership (joint LLC, for example), then the assets that can be used are limited to what stake you have in the business. So, if you have a 75% stake in a joint LLC, that 75% can be used to settle your personal debt.
Another major factor is whether or not the business has assets that can be liquidated. If you own a music recording studio or are a restaurant owner, you may own several pieces of expensive equipment, or even your building, which can be sold off to settle your debt. If, however, you are a real estate agent or a hairdresser, you most likely do not have machinery or other equipment that could be significant to settling your debt. Still some assets are difficult to sell off, such as mineral rights.
Another question, possibly the most common is “can I keep my business despite my personal bankruptcy?” One of the first questions I ask when this comes up is “do you WANT to keep your business?” Often, a failed business venture can be the impetus for a personal bankruptcy, in which case, the filer would need to make some decisions about how they want to move forward.
If the debt isn’t an outgrowth of a failed business, a sole proprietor may wish to elect to file a Chapter 13 bankruptcy, which allows for reorganizing the business, rather than liquidating assets.
Occasionally, I will be asked “should the business file bankruptcy?” If your debt involves your stake in a partnership or a corporation, then you do need to consider this. Because the company is its own legal entity, then debt relief for this would need to be sought separately from any personal bankruptcy. This can be done through a Chapter 7 filing (liquidation) or a
Chapter 11 (business reorganization).The decision would most likely come down to whether you and your partner(s) feel you can turn the business around, and whether your creditors agree.
In fact, if you are in an incorporated business, you may end up filing business bankruptcy without filing personal bankruptcy. There are several ways this could play out.
Note that while you may seek liquidation in your personal filing, you do not have to file that way for your business. You may seek to reorganize the business to make it profitable again. One of the benefits of the reorganization is that the trustee will oversee the debt relief and reorganization, while you can focus on generating revenue.
Do you own a business and are considering bankruptcy? Contact The Mitten Law Firm today for a free consultation. We will go over your case and help you navigate the decision making process.
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