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.