Categories: Business Basics

Bankruptcy and Your Sole Proprietorship: 3 Things You Need to Know

Being the sole proprietor of a business has many benefits, even if it does require a heavy workload. The possibility of bankruptcy, however, can be terrifying, especially when you’re on your own.

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.

Deborah Sweeney

Deborah Sweeney is an advocate for protecting personal and business assets for business owners and entrepreneurs. With extensive experience in the field of corporate and intellectual property law, Deborah provides insightful commentary on the benefits of incorporation and trademark registration. Education: Deborah received her Juris Doctor and Master of Business Administration degrees from Pepperdine University, and has served as an adjunct professor at the University of West Los Angeles and San Fernando School of Law in corporate and intellectual property law. Experience: After becoming a partner at LA-based law firm, Michel & Robinson, she became an in-house attorney for MyCorporation, formerly a division in Intuit. She took the company private in 2009 and after 10 years of entrepreneurship sold the company to Deluxe Corporation. Deborah is also well-recognized for her written work online as a contributing writer with some of the top business and entrepreneurial blogging sites including Forbes, Business Insider, SCORE, and Fox Business, among others. Fun facts/Other pursuits: Originally from Southern California, Deborah enjoys spending time with her husband and two sons, Benjamin and Christopher, and practicing Pilates. Deborah believes in the importance of family and credits the entrepreneurial business model for giving her the flexibility to enjoy both a career and motherhood. Deborah, and MyCorporation, have previously been honored by the San Fernando Valley Business Journal’s List of the Valley’s Largest Women-Owned Businesses in 2012. MyCorporation received the Stevie Award for Best Women-Owned Business in 2011.

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rachel frampton says:

10 years ago at 12:43 AM

My dad is planning to hire a bankruptcy lawyer that will be able to help me file a chapter 13 bankruptcy because I can no longer pay for my mortgage. Well, thank you for elaborating here that my dad would have to liquidate all of his assets if he'll opt for chapter 13. Of course, we'll keep in mind to conduct thorough research first before making any final decisions.