How does Bankruptcy Work if you own a Business?

When you own a business and wish to file bankruptcy, the chapter of bankruptcy you file will depend upon how your business is set up. If you are a sole proprietor, your business debts are considered personal debts and generally, filing a personal bankruptcy will take care of your business debts as well.

If your business is a corporation and has debt, the business may only file a chapter 7 or chapter 11 bankruptcy. However, corporations are not entitled to a discharge of debt in a chapter 7 bankruptcy. Corporations file chapter 7 bankruptcies mainly to show their creditors that there is nothing left of the assets of the business. If there are assets that can be liquidated and distributed to creditors, the chapter 7 trustee will do so.

Often, the main shareholder of the corporation will have personally guaranteed the corporation’s debts and therefore, even if the corporation files for bankruptcy, the shareholder will still be personally liable on the debt. Many times, the shareholder and the corporation will both need to file bankruptcy in order to deal with the debt.

Filing a chapter 11 bankruptcy will allow the business to stay open, but usually costs thousands of dollars in legal fees. For this reason many corporations let the business lapse rather than file bankruptcy.

Filing Bankruptcy if you’re a Sole Proprietor

If your business carries a large inventory that can generate some income and you are filing a chapter 7 bankruptcy the trustee may shut the business down, sell the assets, and pay your creditors. In addition, if you have employee’s or run your business out of a storefront, the chapter 7 trustee will want to shut your business down so that they don’t incur personal liability. One way to avoid this is to have your bankruptcy attorney immediately file a motion to abandon the business. If the business doesn’t have non-exempt assets this motion should be granted and the business may stay open while the bankruptcy is pending.

If your business is more service oriented such as a contractor or a law firm you may be able to keep your business open while you are in Chapter 7 bankruptcy, but it still advisable to speak with an experience bankruptcy attorney to discuss your options.

If your business is struggling and you wish to let it go, it may be best to file a chapter 7. A chapter 13 may be better suited for you if your business is profitable, or you have employees, and you wish to keep it open. The chapter of bankruptcy you file will also depend on which chapter you qualify for.

Owning your Business as a Corporation or LLC and Filing Bankruptcy

Corporations can only file chapter 7 or chapter 11 bankruptcies. The corporation must be represented by an attorney; owners can not represent the corporation unless they themselves are attorneys. The options available to corporations in bankruptcy are:

  • Leave the business out of the filing and file bankruptcy as an individual.
  • Have only the business file bankruptcy
  • File bankruptcy yourself and have the business file a separate bankruptcy.
  • Let the business lapse and file bankruptcy as an individual.

How you proceed will depend on how effective you were at keeping your personal and business debts separate, and; if, as the owner of the corporation, you personally guaranteed the corporations debts. In addition, if as the owner, you used corporate money for personal use, the trustee may be able to “pierce the corporate veil,” and you will be personally liable for the business debts.

Filing Bankruptcy if you are in a Business Partnership

If you file chapter 7 bankruptcy while in a partnership your partner may become responsible for the debt incurred by the business. If you are in a partnership and are thinking about filing bankruptcy, it may be a good idea to talk to a small business attorney. Some partnerships are set up so that if one person files bankruptcy they will have to terminate their interest in the business before they file. It is important to know these details before filing bankruptcy.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy under the bankruptcy code.