Recently on our legal forum a business owner asked, “I am a sole proprietor, but I believe I am going to have to file bankruptcy. What are my bankruptcy options, and will my creditors be able to repossess my personal assets to repay my debt obligations?”
Sole proprietor and bankruptcy
Filing bankruptcy will be different whether you are a sole proprietor, a limited liability corporation or a partnership.
If you have a business and you are the sole owner there is no separation between what you own and what the company owns.
What will this mean for you if you decide not to repay your debts? First, because you are not a separate entity, you will be responsible for repaying your creditors. If you fail to repay them they will have the legal right to pursue a judgment against you to recover the debt. If they win their case in court there will be legal options for them to liquidate your unprotected assets such as homes, cars, and personal bank accounts.
Filing bankruptcy as a sole proprietor what are my options?
Now, if as a sole proprietor you have no assets and nothing to liquidate and no wages to garnish, a judgment may have little impact on you (although your credit score will plummet and collection actions may be allowed to continue for years). If you get a job, however, certain states may allow creditors to pursue a wage garnishment against you. In the end, it’s likely you will have to repay your creditors.
If you want to be proactive and address your financial issues through bankruptcy, however, you have three options: You can file Chapter 7, Chapter 11, or Chapter 13 bankruptcy.
- Chapter 7
Chapter 7 bankruptcy allows a trustee to collect all of your nonexempt property and sell it, using the proceeds from the sale to repay your creditors. After the sale any remaining, qualifying unsecured debt is discharged by the bankruptcy court.
Chapter 7 does not reorganize the business or allow you to continue business operations. If that is your goal you will need to review your options to file Chapter 11.
- Chapter 13
Filing Chapter 7 is not an option for all debtors. In fact, if your income is too high you will not qualify for Chapter 7. If your business has failed and you have no income this may not be an issue, but you will need to review your state’s Chapter 7 income requirements for more information.
If you are not allowed to file Chapter 7 bankruptcy another option is to file Chapter 13 bankruptcy. This option allows you to restructure your debt payments over a 3 or 5 year plan, with the remaining unsecured debts discharged at the end of the repayment period.
- Chapter 11
Finally, if you did want to remain in business and simply restructure your debt obligations to your creditors you could file Chapter 11 bankruptcy. This option allows you to create a plan to deal with your outstanding debt and repay your creditors within the next 20 years. The court and creditors must both approve of this plan.
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