Small business owners have additional concerns when filing Chapter 7 cases
The lines often blur between personal and business assets - and the debts that may be attached to them - when a small business owner files bankruptcy. The legal status of the company can easily overlap with a petition for personal bankruptcy in U.S. Bankruptcy Court.
A solo owner typically is considered in the same league as a consumer when it comes to purchasing materials or banking. The court sees little difference between the owner's personal and business estate, according to the Clagett Law Office in West Virginia.
While business debts in a corporation or a limited liability company (LLC) are generally seen as separate from personal bills, such businesses could be viewed as an asset of the individual's personal bankruptcy estate. They may have to be sold if valued higher than the state or federal exemptions allow.
All of this is especially true for those seeking relief from Chapter 7, in which all non-exempt assets must be sold to pay off creditors. Some assets necessary to running a business, such as tools of the trade or a vehicle, may not be exempt for their full worth.
When it is the corporation or LLC and not the individual's assets that are the subject of a bankruptcy, the owner's personal items could still be at risk. The debts attached to a small business with this legal status are often guaranteed by the owner, who may be forced to file personal bankruptcy as a result.
For small companies that are exempt or otherwise left out of a Chapter 7 action, there could yet be ramifications for the business operation and its owner. The bankrupt individual's corporate shares may have to be placed under the control of the court trustee assigned to the case. Some aspects of running the business, such as voting privileges on corporate matters, could be revoked.
Filing Chapter 13 bankruptcy, in which a court-ordered plan is required to pay back creditors for three to five years, affects a person's business less than in Chapter 7 cases. Virtually all property is protected for the duration of a Chapter 13 filing.
However, Chapter 13 debtors who are confronted with spending all their disposable income in monthly installments to pay creditors may have to weigh the value of continuing their company and maintaining assets needed to keep it going.
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