Bankruptcy Options for Sole Proprietors
Legally, as a sole proprietor there is no separation between personal finances and those of a business. This means filing for bankruptcy will affect both the business owner and the business, regardless of which was responsible for the debts. There are various ways to go about filing for bankruptcy, and the process is different for everyone. Before jumping into the filing process, it is important to consider all of the many options available to determine which makes the most sense for the situation. In order to help, our West Palm Beach bankruptcy law firm has answered a few common questions about the process.
Which Chapter Should Sole Proprietor’s File?
Whereas a corporation or limited liability company (LLC) is a separate legal entity and can file for its own bankruptcy, there is no legal distinction for a sole owner of a company, which means that single proprietors must file for personal bankruptcy. However, which chapter is filed depends on the amount of assets and debt, how the business is organized, and whether or not the individual wishes to maintain the business after filing for bankruptcy. Ultimately, there are three ways a sole proprietor can file for bankruptcy: under Chapter 7, Chapter 13, or Chapter 11.
Chapter 7 is a method of filing for personal bankruptcy in which the individual must liquidate his assets in order to alleviate debt. While most personal necessities such as a home, car, furniture, and clothing can be exempt from liquidation, most business assets are not exempt, and the filer is likely to lose them. Additionally, the business may be shut down until the bankruptcy case is cleared.
Who should file for Chapter 7 bankruptcy?
If more than half of one’s debts come from a business, the owner is eligible for chapter 7 bankruptcy, regardless of income. Although losing property is not ideal, the benefit of filing for Chapter 7 bankruptcy is that the individual will receive a bankruptcy discharge more quickly (usually four to six months), and will not have to commit to a repayment plan. Additionally, most business debts such as debt to vendors, suppliers, and credit card companies will no longer be the filer’s responsibility.
This chapter is a method of filing for personal bankruptcy in which property is not given up. Instead, the filer must commit to a three to five year repayment plan to pay off any debts.
Who should file for Chapter 13 bankruptcy?
If the individual does not want to shut down his/her business, Chapter 13 may be a more suitable option. However, take note that filers will have to commit all of their disposable income to repaying debt for a few years, and will also need to get the approval of the trustees before making any financial transactions. These obstacles can make it difficult to run a business, however, it can be done.
Also known as “reorganization” bankruptcy, filing for chapter 11 bankruptcy allows the filer to keep the business alive by proposing a plan of reorganization to repay creditors over time. However, this option may require him to liquidate personal estate to repay company debts.
Who should file for Chapter 11 bankruptcy?
This is another feasible option if one wishes to continue running the business, although it may put personal assets at risk. Chapter 11 is more expensive and time consuming than other options, and it is usually more fitting for a corporation because a company can issue additional stock to help pay off debt. However, special provisions may be allowed for small business debtors filing for Chapter 11 bankruptcy.
With so many different options and your finances at stake, it is important to talk to a bankruptcy lawyer before making any serious commitments. Schedule an appointment with one of our experienced bankruptcy attorneys in Boynton Beach to determine which option is best for your situation.