In a previous article, "When Your Business is in the RED," the different types of business classifications were discussed and the not so subtle differences between personal and business liability. Here is the conclusion to this article.
Business vs. Personal Bankruptcy
If a small business owner is a sole proprietor, they can file for Chapter 11, Chapter 13, or Chapter 7 Bankruptcy. Their liabilities are considered personal and not professional debt. Their choices would be indicative of their personal circumstances. If owners wanted to keep their business and restructure their debt; they would file for Chapter 11 Re-Organization bankruptcy. If their debt is too overwhelming to re-pay, Chapter 7 would be the clear choice.
However, businesses should always consult a qualified Bankruptcy Attorney when choosing to file any form of Bankruptcy.Small business owners will be in need of sound advice and only an attorney can advise them of the proper course of action for their situation.
Distinctive Differences between Small Business Types
If an owner is considered a corporate shareholder, LLC owner, or partner in a partnership and they've signed personal guarantees or pledged collateral for business loans; filing for business bankruptcy cannot protect their personal property. Their assets can be re-possessed by creditors.
If small business owners do have to file for personal bankruptcy, they would choose either Chapter 7 or Chapter 13. In a Chapter 7 bankruptcy, their assets (except for property that's exempt under state or federal law) can be sold to pay off their creditors.
However, at the conclusion of their proceedings; all of their debts that are eligible will be discharged. An advantage of Chapter 7 would be that they should not be liable for any other lawsuits once their debts are discharged.
Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy, their attorney will present a Court Monitored re-payment plan that will consist of anywhere from three to five years to repay their creditors all or most of their debt. The advantage of
Chapter 13 is that they are able to stop foreclosures and re-possessions of their personal property as long as their income remains steady and they make their agreed upon monthly payments to the court. The court then redistributes their funds to their creditors.
With any form of bankruptcy, there is potential for loss of an owner's personal assets; however, if they are careful to not attach them to their business, many times the owner can avoid that loss. Again, the emphasis is to make the correct choice by first consulting with a qualified and licensed Bankruptcy Attorney. Small businesses need to research their rights and they may also consult consumer and business advocacy groups that will be able to assist them in hiring the right Attorney for their situation.
For more information, please see part one of this article, "When Your Business is in the RED."
Korie Schmidt - I am a former High School and Middle School English Teacher that decided to stay at home after the birth of my second child. I am a ...
