Avoiding Personal Bankruptcy as a Business Owner

When you run a business and are facing bankruptcy, there are a lot of ways that it can play out. It depends on how your business is structured and what type of bankruptcy you file. You may be able to keep your business if you file personal bankruptcy.

What Type of Business Do You Have?

If your business is a sole proprietorship, the assets essentially belong to the business owner, you. Partnerships, LLCs and corporations function as their own legal entities. This determines who files for bankruptcy. Under a sole proprietorship, if the business owner files for a bankruptcy, the business falls under the bankruptcy. In a partnership, LLC or corporation, the business property is separate from personal finances. If the business files for bankruptcy, you don’t have to worry about your personal assets being sold to pay your business debt.

What Type of Bankruptcy Should You File?

Chapter 7 bankruptcies are for people who don’t have a means to repay their debts. In a Chapter 7 bankruptcy, as a sole proprietor, your business assets become part of your bankruptcy estate. The trustee may sell off your business assets to repay a portion of your debts. You’ll likely lose your business. If the business files a Chapter 7 bankruptcy, the business is liquidated and closed. However, the trustee may allow you to keep your “tools of the trade” under an exemption.

If you file Chapter 7 personally, but own shares of a partnership, LLC or corporation, the bankruptcy trustee would sell your interest in the company, not the entire business. The business would go on, but your stake in the business would be disrupted.

Chapter 13 bankruptcies are for personal debts, not businesses. This type of bankruptcy restructures your debts. You make monthly payments toward your debt, which protects you from creditors. If you want to keep a business operating as a sole proprietor, this is one option. A partnership or corporation cannot file Chapter 13. Chapter 11 bankruptcies are the business equivalent of Chapter 13.  You can still operate your business while making payments toward your debt.

Other Options Beyond Bankruptcy

Bankruptcies are often a last resort. You may be able to negotiate and settle debt with your creditors for a lower amount without going through a bankruptcy. You could sell your business instead of going through a bankruptcy, but that doesn’t mean your business would still operate. It’s important to discuss your business structure with a Chapter 7 bankruptcy lawyer such as one from Kamper & Estrada, PLLC to understand how a bankruptcy would affect your finances.