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Small Business Bankruptcy – Chapter 7 vs. Chapter 13

If you own a small business, there is the possibility that you have accumulated a significant amount of business related debt. If your personal or business debt ever starts to grow so much that you feel like there is no way out, consider the possibility of filing for bankruptcy. Many people believe that filing for bankruptcy is the beginning of the end of being in business. However, the reality is that bankruptcy law were created by the U.S. Congress to be used by honest people in the midst of unfortunate financial situations. Bankruptcy is designed for and remains an option for those who need a way to obtain a financial fresh start. And bankruptcy can be especially helpful for owners of small businesses.

Business Bankruptcy Liability
If you are a sole proprietor or a general partner in a business, you are subject (personally liable) for the commitments of your organization. This means that if the business does not pay its debts, creditors may sue you personally and take (through garnishment and seizure) your personal assets to pay off the debts. In the event that you have limited your liability for business debts, or your business is a limited liability company (LLC), corporation, or limited partnership you may not always personally held personally responsible for unpaid business debts. However, many business owners sign “personal guarantees” for many business loans, leases and services either because they are required or they did not negotiate an arrangement that did not require one. Therefore, you may still be held liable for any of your business’ debts in the event that you cosigned or personally guaranteed the obligation. a personal guarantee will usually be included and signed in most small business loans, service agreements and leases.

Bankruptcy Options
Determining which bankruptcy chapter is the best option for you and your business depends on your debts and how your business is structured. Chapter 7 and 13 bankruptcies each offer certain benefits and downsides which are described below.

Chapter 7 Bankruptcy for Business and Personal Debts
Chapter 7 is a form of bankruptcy available to borrowers that do not have the finances and resources to satisfy their commitments and proceed in business. Chapter 7 bankruptcy can be filed by both a person (individual or married couples) and organized businesses. In the event that you own company, corporation or LLC, you can file a Chapter 7 bankruptcy for the benefit of your business. Chapter 7 is mainly used to liquidate and close a business. The business does not get a discharge of it’s debts and can’t utilize the asset exemptions an individual or married couple can. At the point when bankruptcy is filed, the bankruptcy trustee begins to examine the business to see if it has assets that are worth liquidating to pay its creditors. A Chapter 7 business bankruptcy case is generally an favorable alternative for small business owners who wish to close their business and prefer not to sell of the business assets piece by piece or deal directly with creditors. However, remember that a Chapter 7 business bankruptcy does not absolve your of your individual personal debts on any personally guaranteed business debts.

It is important to remember that your business cannot declare Chapter 7 bankruptcy in the event that the business is not officially organized as a corporation, LLC, etc. Since a sole proprietorship (which is not organized form of business) is not a different and separate legal entity from its owner(s), all business assets and debts are actually the assets and debts of the owner(s). Therefore, a sole proprietor must file a personal bankruptcy to discharge their business debts. The advantage of this is that you can wipe out both personal and business debts while utilizing the bankruptcy asset exemptions to preserve materials, tools, inventory, equipment, etc. that you may need for your business to continue. This means that you may have the option to continue operating your business uninterrupted even after a bankruptcy. Additionally, in the event that you are personally liable for the debts of your business, a personal Chapter 7 case can discharge your personal obligations for business debts. Many entrepreneurs who file a Chapter 7 business bankruptcy also file a personal bankruptcy case as well. And many of these same entrepreneurs go on to start new businesses and ventures very soon after filing.

Chapter 13 Bankruptcy for Business and Personal Debts
Chapter 13 bankruptcy cases can only be filed by a person or a married couple. A business cannot file a Chapter 13, although a Chapter 11 is an alternative that should be considered (but is not discussed in this article). An individual filing a Chapter 13 must meet several requirements, including limitations on the amount of debt that is owed. As of the date of this article, an individual filing a Chapter 13 must not owe more than $1,149,525 in secured debt or $383,175 in unsecured debt. If someone owes more than these amounts, they should consider filing a personal Chapter 7 case or the rarely filed, but available personal Chapter 11 case.

In Summary
As previously mentioned, a business cannot file for Chapter 13, but can file a Chapter 7 or a Chapter 11. And the owner(s) of sole proprietorships are personally obligated for the debts of their business. Therefore, a personal Chapter 7 or Chapter 13 bankruptcy (or the rarely filed personal Chapter 11) are the bankruptcy options available. If the owner of a sole proprietorship files a Chapter 13, all their business debts are usually included in the Chapter 13 payment plan. The Chapter 13 bankruptcy is intended to give the filer a chance to keep most or all of their property and pay some or all of their debts through a monthly payment plan, making it a great choice for sole proprietors with significant assets. The same as a Chapter 7, a Chapter 13 bankruptcy allows small business owners to discharge their personal responsibility for business debts. And a Chapter 13 is normally utilized by business owners with significant assets they want to maintain, or who aren’t eligible to file under Chapter 7 (due to income) or a personal Chapter 11 case.

If you are a business owner facing personal debts or other economic hardship and you have questions filing bankruptcy, call us at 770-609-1247 to discuss how we can assist you.

Content Revised: 2016-01-28