Business owners and entrepreneurs may find themselves drowning in massive personal debt. These debts may be business-related, or they may be the result of medical debt or credit spending. In either case, bankruptcy normally provides consumers with a path forward, a way to discharge debt and start fresh.
But what happens if you need to declare bankruptcy, but you want to keep your business?
Different kinds of bankruptcy will affect your businesses differently. Today, we’re going to outline the difference between Chapter 7 and Chapter 11 bankruptcy.
Chapter 7 Bankruptcy & Businesses
Chapter 7 bankruptcy is the most common form of bankruptcy: “liquidation” bankruptcy. In Chapter 7, filers turn over their assets and debts to a bankruptcy trustee, who will sell the assets and divide the proceeds among the various lenders and creditors.
Unfortunately, if a person files for Chapter 7 personally (not as a business), any business assets they own will not be exempt from liquidation. If a person runs a service-type business that requires very little equipment, they may be able to continue their business during and after a Chapter 7 bankruptcy. However, the majority of business assets will be liquidated, which means closing down the business.
Service-oriented businesses that can survive Chapter 7 include:
- Sole proprietorships (accountants, lawyers)
- Fitness trainers
- Freelance workers
- Any person who provides a service through ability, not equipment
Keep in mind that proceeds from these businesses will still become part of your bankruptcy estate.
Chapter 13 Bankruptcy & Businesses
Only individuals can file for Chapter 13 bankruptcy, also known as the “wage earner’s bankruptcy.” There’s more information on our Chapter 13 bankruptcy page, but in summary, filers create a 3-5 year repayment plan to pay off their debt in a single monthly payment, and the rest is discharged after the repayment plan concludes.
If you’re a sole proprietor with a lot of business assets, a Chapter 13 would be an ideal way to protect your business while paying off and discharging your debt.
The disadvantage to a Chapter 13 bankruptcy is that the length of the bankruptcy is 3-5 years. If your income relies on your business, there’s little room for error or fluctuating revenue. The other disadvantage is that if your business has its own debts, then those debts will not be discharged. Only your personal debt and your personal liability for business debt will be wiped out.
To Keep Your Business Intact, You’ll Need Legal Counsel
Bankruptcy law treats business assets differently depending on the type of business, how the business is structured, and how much of the business belongs to you directly. If you plan on keeping your business running while declaring bankruptcy, you’ll need a skilled attorney to guide you through the process and ensure the protection of your business assets.
Huebner Law Firm, PC has been providing consumers and business owners since 1998 with counsel to help them discharge debt and achieve financial freedom. Speak with us in a free consultation to determine the best course of action for you and your business today.