Declaring bankruptcy doesn't have to mean that you lose your business. If you own a business and declare personal bankruptcy, the consequences will be determined based on the type of bankruptcy you declare and the type of business you own. Here's what you need to know.
The Type of Bankruptcy You Declare
There are two types of bankruptcy: Chapter 7 and Chapter 13. When you declare chapter 7 bankruptcy, you liquidate your assets to pay off what debts you can, and the rest of the debts are dissolved. Some debts cannot be discharged through Chapter 7 bankruptcy except under very special circumstances, but most debts can.
If you have a small business, you may need to shut it down during your chapter 7 bankruptcy case because if you have a schedule C business, the assets of your business may fall under you personally.
Chapter 13 bankruptcy restructures your debts so you can pay them off. It is a type of payment plan, through which you promise to pay your creditors off in a specific span of time. Due to the nature of chapter 13 bankruptcy, you can usually keep all of your assets, though it may be advisable to liquidate some to reduce the total burden of your debt.
Chapter 13 bankruptcy is usually recommended if you can pay off your debt with your current income but need help getting current on your debts. If you declare chapter 13 bankruptcy, you will likely be able to keep your business.
The Type of Business You Have
If you declare chapter 13 bankruptcy, you can usually keep your business regardless of the type of business you own. If you declare chapter 7 bankruptcy, however, the type of business you own matters. If you have sole proprietorship of your small business, and you declare chapter 7 bankruptcy, you will likely have to dissolve the business so you can pay off your debts. However, there are times when you will be able to keep your business.
If you have a partnership or an LLC, you can't force the others to sell their shares of the business, and consequently, the business can remain open, unless you own the majority of the business. Then your creditors may file a lien against your business when you declare bankruptcy, which means that your creditors will collect your business's profits.
Another scenario in which your business may be considered negligible is if your business doesn't have any substantial equity. If you have a small business that has no assets and no equity, there is no point to liquidating that business as it will not be able to pay off any of your debts.
On the other hand, if you have a small business that has debts rather than equity, it's very likely that the business will need to be closed down so these debts can be paid off. For example, under a schedule C business, those debts are your debts.
Declaring Bankruptcy With a Business
Regardless of whether you're declaring chapter 7 or chapter 13 bankruptcy, you need to include your business in your filing documents. Be prepared to show your company's financial statements to the courts, including general ledgers, balance sheets, and bank balances. You will need these documents to complete the process.
Declaring bankruptcy is always more difficult when you have a business. However, that doesn't mean that you can't declare bankruptcy - it just means that you need to be careful. You can consult with a bankruptcy attorney now to avoid any surprises later on. Contact William S. Orange III - ATTORNEY AT LAW - to schedule a consultation.