Businesses that are impacted by the coronavirus pandemic may be wondering where they should turn. Small businesses make up a third of the U.S. economy and with the unforeseeable future small business owners may be thinking about filing bankruptcy to help them get out of debt. Business bankruptcy can be a way to help individuals start over. Below we will discuss the different chapters of personal bankruptcy that small business owners may be able to file to get out of debt. Business owners will need to think about whether or not they want to keep running their business or shut their business down.
What Type of Business Are You?
Business owners first need to determine what type of business they are. Three types of bankruptcy will depend on the structure of the business. The three types of business structures are:
- Sole Proprietorships– Sole Proprietorships are an extension of the owner. In a sole proprietorship the individual is liable for the assets and liabilities. Sole Proprietors typically file Chapter 7 bankruptcy or Chapter 13 bankruptcy to reorganize their debt.
- Corporations– Corporations are a separate entity from the owner. Typically these types of entities file Chapter 11 relief.
- Partnerships– Partnerships like corporations are also a separate entity from the owner. Typically partnerships file chapter 11 relief.
Chapter 7 Bankruptcy For Small Business Owners
Chapter 7 bankruptcy is a tool that can be used to eliminate business debt for some small business owners. Chapter 7 is usually the best option for business owners that will need to close their business in the foreseeable future. Another term for Chapter 7 bankruptcy is liquidation. Chapter 7 bankruptcy can be used for Sole proprietorships, Corporations, and partnerships. Unfortunately, in Chapter 7 bankruptcy, businesses don’t get a discharge thus, the business is still liable for the debt. Individuals often file a Chapter 7 bankruptcy to get rid of business debt they guaranteed.
Many business owners are usually unaware that they guaranteed their business debt. Often, creditors will make new businesses sign a personal guarantee as an extra precaution. Creditors know that new businesses may not succeed thus, making individuals sign a personal guarantee means if the business closes they can go after an individual’s assets in addition to the business assets.
Service-based businesses and sole proprietors often benefit the most from filing Chapter 7. These business owners can file Chapter 7 bankruptcy without qualifying under the Means Test. As long as an individual’s debt is mostly business debt the individual is exempt from the Means Test. Thus, high wage earners can get their debts wiped away in a Chapter 7 bankruptcy.
A Chapter 7 bankruptcy is a good tool to help small business owners with little assets. In Chapter 7 bankruptcy, assets become part of the bankruptcy estate. Any assets that are not exempt can be taken to pay off creditors. Many small businesses or service-based businesses don’t have many assets. In this case some individuals can keep their business assets, continue running their business, and wipe out their liability.
Individuals with a lot of business assets with equity may be better off filing a Chapter 11 or Chapter 13 unless they want to just walk away and close their business. If the individual wants to walk away from their business and close the business they have the option to do this as well. Individuals can shut down their business and start a new career. By filing a Chapter 7 bankruptcy the individual will no longer be liable for the debt making it easier for them to start a new career.
Chapter 13 Bankruptcy For Small Business Owners
Chapter 13 bankruptcy can help individuals reorganize their debts. This type of bankruptcy can be used for sole proprietorships. Keep in mind, Chapter 13 bankruptcy isn’t always the best option for business owners. Only individuals can file under Chapter 13. Thus, LLCs, corporations, and other businesses will need to file for Chapter 11 bankruptcy instead.
Individuals file Chapter 13 bankruptcy to get rid of their liability. Chapter 13 bankruptcy allows individuals to enter into a 3-5 year repayment plan. Any debt that is not paid in full through the plan is discharged. Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy allows individuals to keep their business open and repay their debts.
Filing a Chapter 13 bankruptcy is advantageous for people who have assets. Business owners with assets can keep their assets and pay off their debt over time. Individuals can pay back the equity in the assets allowing them to keep them. This may be an advantage to individuals who are considering filing a Chapter 7 bankruptcy instead.
Many sole proprietorships interwind their assets with their business assets. Filing a Chapter 13 bankruptcy can allow business owners with homes to keep their homes and reorganize their debt through a Chapter 13 repayment plan.
Chapter 13 can also help individuals catch up on arrears, credit card payments, personal loans, tax debt, alimony, and child support. Many businesses owe tax debt and filing bankruptcy can be a way to help them pay it back.
What to Do If Considering a Business Bankruptcy
If an individual is considering a business bankruptcy it may be time to sit down and speak with a lawyer about what options are available. Bankruptcy laws are complicated especially when there is a business involved. A bankruptcy attorney can help individuals plan out how to wind down their business. Bankruptcy laws are complex and many individuals are unaware that there are things that can’t be done before closing a business. For example, individuals shouldn’t sell all of their assets and then file bankruptcy or give away their interest in the business to someone. These types of transactions can be seen as a fraudulent transfer. Business owners must sit down and speak with a bankruptcy lawyer if they see they may face financial hardship in the foreseeable future.