If you ever find yourself in a position where bankruptcy is your best option, it’s critical that you’re prepared. The following are three things you should know about sole proprietorship and bankruptcy and what it means for you and your business.
1. You and “the business” are not separate entities.
You may wonder if it’s possible to file bankruptcy for the company and not involve your own credit in the process. In short, the answer is no. Even though you have a license from the city for “doing business as” you do not get to sever yourself from your company entirely in times of bankruptcy. While corporations and LLCs are able to keep their personal accounts out of their business, as sole proprietor you are not. Make sure to check all of your finances and consult a bankruptcy attorney to see how your decision to file will affect you in both the short and long term.
2. You may have to file Chapter 7 for your sole proprietorship.
Chapter 7 is the most common form of bankruptcy filed in the United States. While it’s common, many key points are often overlooked.
As soon as you file Chapter 7 all assets enter into the bankruptcy estate, including your inventory. In other words, your Chapter 7 trustee is now trustee of all of your assets and inventory. This means you have to have an accurate account of the value of your assets if you hope to exempt or keep some. Otherwise, your trustee may be able to liquidate everything.
In addition to controlling your assets, the trustee is responsible for any liabilities within your business. For instance, your trustee can force you to close the business itself while your assets are administered. Of course this practice varies from trustee to trustee, as well as from company to company. Also note that business type can affect your liability. For example, if you operate a restaurant, your liability potential is higher than if you work from home on your laptop.
3. You’ll have to understand the difference between Chapter 7 and Chapter 13.
One of the most important differences between the Chapter 7 and 13 bankruptcy filings is that a Chapter 13 status means that the sole proprietor isn’t in danger of being forced to close the place of business for the trustee to administer your assets. Additionally, a sole proprietor can actually choose whether or not to shut down the business before or during the Chapter 7 and therefore retains control of their place of business throughout the filing process.
Another important distinction is that a sole proprietor under Chapter 13 doesn’t have to liquidate all assets. What this means is that Chapter 13 offers more flexibility to businesses than Chapter 7, allowing you to keep your physical inventory and assets instead of forcing you to liquidate them.
Before you decide which bankruptcy to file make sure you’ve done your research and apply for that which best suits your company needs. If you do your research and keep your proverbial ducks in a row, you could maintain control over your place of business and lessen your burden of stress, even when filing bankruptcy.
Julia Richardson works as a bankruptcy attorney consultant at Ziegler Law Office, specializing in debt collection and bankruptcy. As a consultant, Julia aims to help businesses and consumers alike navigate the daunting path of debt relief and bankruptcy in ways that best suit their individual need.