The Ins and Outs of Chapter 7 Bankruptcy for Small Business Owners
It’s a simple fact that small businesses fail all the time and for many different reasons, some that are out of the owner’s control. If you’re falling deeper and deeper into debt by keeping your company open, it may actually be best to shut it down and cut your losses.
When it comes down to closing a debt-laden business, bankruptcy is one option that will help you to stop the bleeding money and get a fresh start. However, filing for certain types of bankruptcy may not be an available option for your business entity or the best way to go for your personal situation. There are multiple types of bankruptcy filings, each having its own benefits and drawbacks.
Here we’ll take a look at Chapter 7 bankruptcy filing, and discuss their benefits and drawbacks.
Who can file Chapter 7 bankruptcy?
First off, chapter 7 is a liquidation bankruptcy, which means all of your non-exempt assets will be sold off by a court-appointed trustee to repay your creditors. Individuals and protected business entities, partnerships, LLCs, and corporations can file Chapter 7 bankruptcy. Business owners can file Chapter 7 for themselves or for their business. However, since a sole proprietor is personally liable for business debts, the entire financial situation of both will be included when they file for a personal chapter 7.
Advantages of Chapter 7 bankruptcy
As a sole proprietor, Chapter 7 lets you wipe out both your personal and business debt in a single filing. Even though your personal assets will be included in the bankruptcy estate, you can use exemptions to protect some of them. Indeed, if you lack a high income or significant assets, you may be able to use exemptions to protect all of your money and property through what’s referred to as a “no-assets case.” This is designed to ensure that smaller businesses can have enough assets to sustain themselves while they start over.
This being said, the amount of property you can protect in a Chapter 7 bankruptcy varies greatly from state to state and also depends on the value of your assets. Given this information, you should always consult your Creative Business Lawyer to review your state’s exemption laws. If your business is a partnership, corporation, or LLC, Chapter 7 is an easy and transparent way to close your business and liquidate its assets, as the trustee becomes responsible for selling off assets and paying your creditors. This provides you with a convenient way to wash your hands of the failing business and start with a clean slate.
Disadvantages of a Chapter 7 bankruptcy
Only sole proprietors receive a discharge of business debts by filing Chapter 7. In addition, business entities are unable to use exemptions to protect assets in Chapter 7, which means that trustees will sell off all of your business assets to pay creditors, and your business will be forced to close for good. Even if you own a protected business entity, you are personally liable for any of your business obligations. Therefore, you are still hooked to the debt unless you file a personal Chapter 7 on behalf of both your business and your personal liabilities.
The Bottom Line
Due to the final nature of Chapter 7, it’s not for everybody. It is best to file Chapter 7 if you’re looking to shut down your business permanently. It is not a good option for high-income filers or those who have lots of property, as depending on your income level. Moreover, some debts are not dischargeable, including student loans, child support, and alimony, along with certain income taxes. In these cases, Chapter 7 would do no good.
Navigating the bankruptcy process is a complicated undertaking and should only be done with the trusted advice of legal counsel. With us as your Access lawyer, we can guide you through the process, explaining all of your options, so you make the choice that’s best for you and your business. Contact us today to learn more.