If you have a home business and are facing the possibility that you may have to declare bankruptcy, it can be a scary proposition, especially if you are unsure how a bankruptcy will affect you or your business. The goal of this article is to replace that fear with fact about how the various types of bankruptcy can affect a home business.
Definition of a Home Business
For purposes of this article, a home business, which may also be known as a home-based business, is a business that has the following characteristics:
-The business is run out of a person’s home or home office.
-The business does not have any employees but is run solely by an individual, the business owner
-The business is a sole proprietorship, existing solely under the individual owner running the business, rather than as a distinct Limited Liability Company (LLC), Limited Partnership (LP), corporation, or other business entity. When a business is a sole proprietorship, there is generally no legal distinction between the business and the business owner. Therefore, assets of the business are legally assets of the business owner.
Common examples of home businesses that have the above characteristics include but should not be limited to Amway, Longaberger, Pampered Chef, Scentsy, and Tupperware.
Applicable Types of Bankruptcy
Given the definition of a home business noted above, there are three common types of bankruptcy that a home business owner can consider.
A Chapter 7 bankruptcy allows for the liquidation of many types of debt, but it also means the bankruptcy trustee may liquidate many of the individual’s assets in order to pay off as many creditors as possible before eliminating the remaining debt.
If the individual has a home business with assets that have a significant value, the bankruptcy trustee may seize and liquidate those assets in an effort to satisfy what is owed to the business owner’s creditors (items that cannot be liquidated are outlined by state and federal bankruptcy exemption statutes and can vary by state).
A Chapter 13 bankruptcy provides a way for an individual to re-organize their debts into a court-approved payment plan, possibly changing payment terms such as the interest rate or the amount owed to make the payments affordable. Once the terms of the payment plan are satisfied under Chapter 13, any remaining debt is generally eliminated.
The impact to a home business under a Chapter 13 bankruptcy would likely be that any income from the business would be considered in determining what payment plan amount the individual could afford, and then that income would need to be used along with any other income earned by the business owner to satisfy that payment plan.
A Chapter 11 bankruptcy provides relief in a similar manner to what Chapter 13 provides for an individual, except the Chapter 11 bankruptcy provides for re-organization of a business, which can include a home business operated as a sole proprietorship.
The impact Chapter 11 has on a business can vary widely depending on the individual circumstances. Under Chapter 11, the bankruptcy has the following broad powers:
-If the bankruptcy court deems there to be sufficient cause, the court can appoint a trustee to run the business instead of the business owner. Sufficient cause might be that the current business owner is not deemed to be capable of running the business in a manner to provide the best chances the business can recover from the bankruptcy by adhering to a payment plan.
-If the debts of a business far exceed the business’s assets, the bankruptcy court may decide to effectively liquidate the assets of the business and leave business ownership in the hands of the creditors.
While Chapter 11 provides room for the bankruptcy court to make these drastic decisions when the situation warrants such action, these avenues are usually reserved for corporations or other large businesses, not for home businesses as defined in this article. Often with a home business, there may be little to no difference between declaring Chapter 11 and Chapter 13 bankruptcy.
In conclusion, declaring bankruptcy when you are the owner of a home business could eliminate the assets of the business or effectively determine where any net income from the business has to be paid. But it would be unusual for bankruptcy to result in a business owner of a home business as defined in this article to completely lose control of their business as a result of declaring bankruptcy.
Keep in mind that the information above is general in nature and should not be taken as legal advice for your specific situation. If you have a home business and believe you need to consider bankruptcy, you should speak with a bankruptcy attorney. A bankruptcy attorney will be familiar with the bankruptcy laws of your state, can ask the right questions to understand the specific type of home business you have, and with that information, advise you of the impact the various types of bankruptcy will have on your home business and other finances.
- Federal income tax significant events, Part 9 – Bankruptcy (taxlawhome.com)
- Bankruptcy Basics: Six Basic Types of Bankruptcies (betterbankruptcy.com)
- A Lawyer is Worthy of His Hire (betterbankruptcy.com)
- Chapter 13 Dismissal and Why It Might Happen (betterbankruptcy.com)
- Bankruptcy Basics: Individual Debt Adjustment in Chapter 13 (betterbankruptcy.com)
- Chapter 7 Questions and Potential Answers (betterbankruptcy.com)
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