Bankruptcy for Small Business Owners

For a company, bankruptcy serves one of three purposes: to keep the company open, to discharge any personal obligations due by the owner, or to sell the company. These objectives can be fulfilled by filing a small business bankruptcy or an owner’s personal bankruptcy.

Will Filing for Bankruptcy Remove All of My Debts?

Debt removal is determined by how your small business entity was established and who the business’s owners are. In most cases, if you are a small business’s sole proprietor, you are personally responsible for any obligations that the company cannot pay.

Again, you might be held accountable if a small number of people control the company and you are the general partner. However, if you merely have a limited partnership, you might not necessarily be held accountable until unusual circumstances occur.

What if My Company is an LLC or Corporation?

Because it is a beneficial choice for them, many people who are corporations or LLCs apply for Chapter 7 bankruptcy. A small business owner operating as an LLC or corporation creates a separate legal entity. This implies that the small business owner wouldn’t be held personally responsible for the corporation’s debts and liabilities. Therefore, only the assets of the organization would be liquidated under Chapter 7, not the personal assets of the tiny owners.

What Kinds of Bankruptcies Are There?

Bankruptcies under Chapters 7, 11, and 13 are all possibilities. Only individuals may pursue Chapter 13 bankruptcy; small firms and individuals may file Chapters 7 and 11.

Bankruptcies under Chapter 7 are used to close down and liquidate businesses. These bankruptcy filings, however, in no way discharge the debt or qualify for exemptions.

Insolvencies under Chapter 11 restructure small businesses so they can carry on with their operations while implementing a new repayment strategy.

Only sole owners may file for bankruptcy under Chapter 13, and only in certain situations. This bankruptcy’s distinctive feature is that it relieves the owner of any personal responsibility for any corporate debt.

Can I Continue Running My Company After Filing for Bankruptcy?

This depends on the kind of bankruptcy you intend to file as a small business owner. A Chapter 7 bankruptcy would not be wise if you wanted to declare bankruptcy while keeping your firm. After filing for Chapter 7 bankruptcy, a small business owner will typically not be allowed to run their company.

When you file for Chapter 7 bankruptcy, a bankruptcy trustee is appointed to sell or liquidate all of your non-exempt assets that have value in order to pay off your debt to your creditors. All of your company’s assets will be sold if you operate as a sole owner. Your commercial property will be one of those assets.

Who Can File for Bankruptcy Under Chapter 7?

The only debtors permitted to petition for Chapter 7 bankruptcy are those who meet specific income requirements. The petitioner’s income must be equal to or lower than the state’s median income in order to be eligible. The “bankruptcy means test” refers to this situation. The means test’s median salaries might differ significantly from state to state. Therefore, it’s crucial to research a state’s income criteria.

A second test will be undertaken that compares the petitioner’s income to their necessary monthly costs if their income is higher than the state’s median income level (e.g., groceries, medications, etc.).

According to the court, the petitioner’s eligibility for Chapter 7 bankruptcy will be determined by the means and essential costs tests. Chapter 13 bankruptcy may still be an option for those who don’t meet the requirements for Chapter 7 bankruptcy.

A petitioner for Chapter 7 bankruptcy must meet several requirements in addition to the income requirements, including attending credit counseling before filing, not attempting to defraud creditors or the court, not having had a debt discharged under Chapter 7 bankruptcy within the previous eight years and more.

Although declaring bankruptcy should normally be avoided, doing so under Chapter 7 offers debtors more advantages than doing so under Chapter 13. For example, a debtor who completes the demands of a Chapter 7 bankruptcy petition may be granted a court judgment that completely discharges their debts.

On the other hand, a debtor who files for Chapter 13 bankruptcy must pay back their creditors in line with a three- to five-year schedule.

Furthermore, in contrast to debtors who file for Chapter 13 bankruptcy, individuals who do so can achieve immediate and permanent relief, are likely to maintain the majority of their assets, and do not need to come up with a repayment plan because creditors will no longer be able to collect on the debt.

Additionally, the debtor will be permitted to keep their future earnings rather than being required to forfeit them as part of their Chapter 13 repayment plan.

What Takes Place with Commercial Assets During a Chapter 7 Bankruptcy?

If you operate your firm as a lone proprietor, you are legally the owner of the company’s assets.

On your bankruptcy documents, you must detail every one of your personal assets and liabilities. The business assets must be listed on the bankruptcy documents you file because you personally own them. These debts will be sold throughout the liquidation process to pay off the amounts you owe to your creditors. Any valuable business assets you cannot be exempt from will be sold to pay off these obligations.

Automatic Stay

A federal bankruptcy court promptly imposes an “automatic stay” following the filing of a Chapter 7 bankruptcy petition by a debtor. An automatic stay is a restraining order that stops debtors from being sued or collected by creditors. The injunction simply prevents further action from collecting or suing for the debt until the bankruptcy process is finished or the stay is lifted. It does not actually dismiss the obligation.

Additionally, it forbids the creditor from engaging in other debt collection practices, such as phoning a debtor, repossessing property, foreclosing on a debtor’s house, garnishing income from their paychecks, or sending collection letters. The automatic stay order will be in effect until a decision is made.

Can a Chapter 7 Bankruptcy Discharge Small Business Tax Debt?

In a Chapter 7 bankruptcy, your business taxes will not be dismissed if you are a small business owner. You personally bear responsibility for any business debt, including tax debt, if you run a small firm. Taxes are not erased even though Chapter 7 bankruptcy eliminates most corporate debt.

Taxes may occasionally be discharged in bankruptcy. If the following conditions are met:

• The tax debt is older than three years.
• It was assessed at least 240 days before the bankruptcy filing.
• The tax return was submitted at least two years before the bankruptcy.
• It has been more than two years since the tax liability was incurred.
• The taxpayer did not evade taxes or commit tax fraud.

In other words, you only need one of the two requirements, not both—a tax liability must be more than three years old or assessed at least 240 days before filing for bankruptcy. The final two conditions must nevertheless be satisfied.

Do I Need an Attorney?

It’s not easy to file for bankruptcy. You should speak with a bankruptcy attorney if you want your bankruptcy claim to be successful. He will evaluate your situation and choose the bankruptcy filing that best suits your requirements.