Filing for bankruptcy is a relatively simple process thanks to the Bankruptcy Code. However, as anything else mired in bureaucracy, the sheer number of rules often complicates it. One confusing rule is what type of bankruptcies a small business owner can file. The answer lies in if their business was incorporated, a partnership, or a sole proprietorship.
In a corporation or an LLC, the business is a separate legal entity from your personal assets. In this case, the corporation is only eligible to file a Chapter 7 bankruptcy. The trustee will then liquidate all business assets and pay off creditors in their order of precedence. The business is then closed. The main advantage to this is that you are not liable for any debts unless you personally guaranteed them.
Partnerships operate much the same as a corporation. It is also a separate legal entity and so must file a Chapter 7. The trustee sells all assets. The trustee then uses the proceeds to pay off the creditors according to their standing. One primary difference is that if there are not enough assets to pay the entire debt, the trustee can sue you or any partner to pay the remaining amount due.
In a sole proprietorship, you are your business. You are not separate legal entities, so there is no difference between business and personal assets. This means that you can file either a Chapter 7 or a Chapter 13. If you file a Chapter 7, you can use exemptions to shield business assets, which may allow your business to stay open. Additionally, all of your debts, both personal and business, are wiped out by the Chapter 7 discharge.
If you file a Chapter 13 bankruptcy, your small business will benefit. Because you and your company are the same legally, business debts are the same as personal debts. This means that they benefit from your Chapter 13 installment plan. This includes tax liens. Additionally, you can reduce your overall debt by renegotiating types of secured debt. This can include vehicle loans or equipment loans. This allows you to lower the monthly payment on your installment plan.
If you own a small business and you are considering filing bankruptcy, it is important that you know your options beforehand. Knowing them helps you know what to expect as the bankruptcy moves forward. As always, if you are unsure about any step in the process, contact a lawyer that specializes in bankruptcies.