Chapter 7 Bankruptcy & Your Business
Filing personal bankruptcy when you own a small business seems doubly scary. In addition to your personal financial struggles, you are scared that your business will be negatively impacted, even dissolved. Downriver business owners should read on, as we answer your questions about Chapter 7 bankruptcy and owning a small business.
Does Personal Bankruptcy Affect Your Business?
Yes, a personal bankruptcy will affect your business. The extent to which it does, however, depends on several factors. Much like your personal finances, your business structure is unique, so it helps to speak with a bankruptcy attorney.
One major factor in how much your business will be impacted by your Chapter 7 bankruptcy is your business structure. If you are a sole proprietor, then legally you ARE your business. This means that any of your business assets could be used to settle your debts. For example, if you run a web design business, then your computer could be up for grabs. If you are in a partnership (LLC) or a corporation, then the business assets that can be used to satisfy your debts are limited to your interest in the business.
Another primary consideration would be whether or not your business has assets that can be liquidated. If you own a construction company, then you probably have high value equipment that can be used to pay down your debt. However, if you are a bookkeeper, you probably don’t have physical assets worth much. Some assets a business owns, such as mineral rights, are difficult to liquidate.
With respect to a partnership or corporation, the trustee could use your interest in the business as an asset to pay your creditors. However, if the business would fail without your participation, then this is an unlikely scenario.
Can You Keep Your Business With Chapter 7 Bankruptcy?
Filing bankruptcy usually results in a period of financial reflection. If you own a business, you will be thinking about whether you can keep it open despite the personal bankruptcy. Many business owners even consider whether they SHOULD keep their business. If the business is your primary source of income and you are in a financial jam, then maybe it is not worth keeping.
You should determine if your debt was created or exacerbated by your business. If so, and you are a sole proprietor, then Chapter 7 bankruptcy might solve the problem, because your entire business would be subject to liquidation.
If your debt is NOT a result of your business and can be rebuilt, you often will not have to give it up when filing a personal bankruptcy. A sole proprietor may choose to file a Chapter 13 reorganization This will provide a timeline for debt payoff instead of a forced liquidation. The bankruptcy trustee will oversee this, allowing you to focus on revenue and income.
Should Your Business File Bankruptcy Also?
If your business is a corporation or partnership, then you will need to determine if your business should file for bankruptcy. In these situations, the business and you are different legal entities, so the business would need to explore its own debt relief options. This decision would be based on whether you (and/or your partners) and your creditors agree that the business is able to be salvaged.
The two major types of business bankruptcy are Chapter 7, which is liquidation, and Chapter 11, which is reorganization.
It is important to note that you do NOT have to file the same type of business bankruptcy as your personal bankruptcy. You may opt for Chapter 7 on your personal bankruptcy, but then file Chapter 11 to keep the business running, paying your debts through revenue.
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