When the economies good many people decide it’s the perfect time to ditch that corporate job and strike out on their own, often opening a business. Unfortunately, when the economy declines and their business fails, those same business owners may be shocked to find that their personal assets are in jeopardy as they struggle to pay their business debt, eventually having to file for bankruptcy.
Recently on our personal bankruptcy forum a user asked, “I started a yogurt shop a few years ago, but I have not been able to make it profitable. I have decided filing bankruptcy to discharge my business debt is my only option. I am wondering whether my personal possessions, as well as my business assets, are going to be in jeopardy if I file for Chapter 7 bankruptcy?”
What happens if a sole propriety files for Chapter 7 bankruptcy?
Even the best business operators often fail to completely plan for what might happen when they file for bankruptcy. Why bother, right? No one plans to have their business fail and optimism often is a driving force for all entrepreneurs.
Unfortunately, if you have a sole proprietorship the bankruptcy court will not care whether the debts are personal or business debt. Creditors will have the right to take certain assets if you business fails. AND even if you had the foresight to get a partner and form a LLC, you might also have put your assets at risk if you had to sign any type of personal guarantee for a loan in order to secure financing for your business.
What business debt can I discharge?
Now, the fact that creditors may have the right to liquidate your personal and business assets if you file for bankruptcy is the bad news, the good news is that there are some unsecured debts, even business debt, which you can discharge through Chapter 7 bankruptcy. If the debts are discharged this will eliminate the creditor’s right to seek collection after the bankruptcy is completed.
So what types of unsecured business debt can be discharged?
- Lawsuit judgments
- Credit card debts
- Medical bills
- Unsecured debts to supplies
- Unsecured debts to other professionals like your accountant or consultant
- Obligations under contracts and leases entered into by the sole proprietor
- Unsecured personal loans
Debts That Survive Chapter 7 Bankruptcy
Now, it’s important to note that whether you file Chapter 7 because your sole proprietorship failed or because you had personal debts that you could not pay, there are still debts that will survive the bankruptcy.
Common debts which are not discharged include child and spousal support obligations, recent tax debts, court imposed fines and restitution, cash advances taken within a specified time period prior to the bankruptcy filing, loans owed against your pension plan, student loans (exceptions exist), debts generated from fraudulent activities, debts from personal injury claims from DUI cases, debts incurred to purchase luxury goods within 90 days from your bankruptcy filing.
Before starting a business make sure you understand the liability you will have if your business fails.
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