If you own a struggling business, you are liable for its debts. A lot of people think that a failing small business needs to file for business bankruptcy if it fails to pay its debts. But the right kind of bankruptcy to file based on the business debt depends on the business’s structure. An experienced bankruptcy attorney can help you decide whether it’s best to file for bankruptcy and whether to file for Chapter 7 Business Bankruptcy or Chapter 13 bankruptcy.
Bankruptcy For Sole Proprietorships
For sole proprietorships, the owners are personally liable for the debts of their business. Since a sole proprietorship isn’t a separate property, the owner files a personal bankruptcy to handle the increasing debt and the debts of the business are treated as personal debts. This means that all the owner’s dischargeable debts, which include small business debts, are eliminated. A personal bankruptcy protects business assets by making use of exemptions and operating the business.
In addition, sole proprietors can also file a Chapter 13 bankruptcy to let them use a debt repayment plan and keep their assets. Those who have a lot of assets may need to sell these assets in a Chapter 7 bankruptcy. However, a Chapter13 bankruptcy lets them keep their business assets and reorganize their debts.
Bankruptcies and Other Business Entities
Limited liability companies (LLCs), corporations, and partnerships can deal with more complicated situations. Because a partnership is a separate entity, owners can file a Chapter 7 bankruptcy, which involves a bankruptcy administrator shutting the business down and liquidating its assets to pay the creditors. In this situation, the bankruptcy of the partnership won’t impact the personal liability of the partners. But they may be liable for the debts of their business when the partnership does not have sufficient assets that can be sold to pay off creditors.
In addition, corporations and LLCs are also separate entities, which means they are eligible to file for Chapter 7 business bankruptcy. If one of the owners cosigned a corporate debt, they still owe this debt following the bankruptcy and would need to file a personal bankruptcy to get a discharge.
Filing for business bankruptcy is time-consuming and complicated. It must be handled properly; otherwise, some debts may not be discharged or some exemptions may not be applied correctly. When this happens, the owners can lose a substantial amount of property. A skilled attorney can assess your business and personal debts to provide you with advice on long-term solutions that fit your specific situation.