It’s no secret that every business can experience financial problems.
In fact, most new entrepreneurs worry about their business surviving the
first year in business, not to mention the first five years! If your
small business is struggling to make ends meet and to repay its obligations, you may
be able to improve the financial health of your business by filing bankruptcy.
“What chapter of bankruptcy do I file?” It depends on the facts
of your case and your goals. For instance, if you’re a partner or
a sole proprietor, you’re personally responsible for your company’s
debts. Meaning, if your business fails to pay its debts, the creditors
can go after
your personal assets, such as your home to satisfy them.
On the other hand, if your company is a Limited Liability Company (LLC),
or if you formed a corporation, you should not be responsible for your
business’s debts. In the case of an LLC or a corporation, creditors
can only go after the company’s assets, not yours. However, if you
cosigned or personally guaranteed a business debt, you may be liable.
Small Business Bankruptcy Options
Generally, small business owners file either a
Chapter 7 or a
Chapter 11 bankruptcy. If your business is a partnership, corporation, or LLC, you
have the option of filing a Chapter 7 bankruptcy for your business. Business
owners typically use Chapter 7 to shut down and liquidate their business.
This chapter does not discharge debts, nor does it utilize exemptions.
With a Chapter 7 business bankruptcy, the trustee sells the business’s
assets in order to pay the creditors. The Chapter 7 is a favorable option
for business owners who want to shut down their businesses but don’t
want to sell assets and deal with the creditors anymore. Keep in mind
that if you opt for a Chapter 7, it will not eliminate your personal liability
to pay off any of your business’s debts.
If you are the sole proprietor of your business, you cannot file a Chapter
7 business bankruptcy. Instead, you’ll have to file a Chapter 7
personal bankruptcy. Why? Because, sole proprietorships are not separate
legal entities from business owners. Meaning, the business assets and
debts belong to the business owner, thus the business owner must file
a Chapter 7 personal bankruptcy.
The benefit of a Chapter 7 personal bankruptcy is you get to wipe out all
personal and business debts with one bankruptcy. Since you can use the
bankruptcy exemptions to protect your business assets, you don’t
have to shut down the business.
Chapter 11 Small Business Bankruptcy
A small business can file a Chapter 11, but it’s more complex than
a Chapter 7. Chapter 11, the reorganization bankruptcy, allows business
owners to continue operating their businesses while reorganizing and paying
off their debts through a repayment plan.
To learn more about small business bankruptcies under chapters 7 and 11,
contact our firm to schedule a free consultation with a Harrisburg small bankruptcy lawyer.