Read This Before You File for Bankruptcy; It Could Keep Your Business Alive
Running a business is a challenge in itself. Running a business while struggling with debt is another beast entirely. If this situation sounds familiar, you may already be considering filing for bankruptcy.
But how can you address your debts without sacrificing your business and all the hard work you’ve put into it?
In some cases, restructuring your business as a sole proprietorship can help. This structure allows certain debts to be handled differently, especially if you’re trying to protect assets and reduce personal financial damage.
If you’re a business owner who is debating whether or not you should file for bankruptcy, this blog is for you. After examining what a sole proprietorship is, we’ll explore how this business structure can influence a bankruptcy filing.
Sole Proprietorship Defined
A sole proprietorship is the simplest type of business structure. It means there’s no legal separation between you and your business. You own it, you run it, and you’re personally responsible for everything, including profits, losses, debts, and taxes.
There’s no need to file paperwork with the state to create a sole proprietorship. It often happens automatically when you start doing business as yourself. If you’ve ever worked as a freelancer, independent contractor, or side gig worker under your own name, you’ve likely operated as a sole proprietor.
Because of its simplicity and flexibility, many small business owners start out this way. You can run a sole proprietorship under your own name or register a “doing business as” (DBA) name.
How a Sole Proprietorship Affects Filing for Bankruptcy
When your business is a sole proprietorship, it’s legally part of you. That means when you file for bankruptcy, you’re also including business debts along with your personal debts.
This can work in your favor if your business debt is personally guaranteed, which is often the case with credit cards, loans, or equipment leases. Filing bankruptcy as a sole proprietor means those business debts can be discharged or reorganized, depending on the type of bankruptcy you file.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is sometimes called “liquidation bankruptcy.” It involves selling off certain assets to pay creditors and then wiping out most of the remaining debt. This option works best for people with limited income who can’t keep up with payments.
In a sole proprietorship, Chapter 7 bankruptcy can help you eliminate both personal and business debt. You may be able to keep tools and equipment needed for your business under certain exemptions, depending on your state laws. This could allow you to continue running your business even after the bankruptcy is complete.
However, keep in mind that any business assets not protected under exemptions may be sold to repay creditors. If your business has valuable inventory or equipment, it could be affected.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is known as a “reorganization” bankruptcy. Instead of wiping out debt right away, you create a repayment plan that lasts three to five years. This plan lets you pay back some or all of your debts over time, often at reduced amounts.
For sole proprietors with steady income, Chapter 13 bankruptcy may be a better option. You can keep your business running and avoid losing valuable assets, as long as you stick to the repayment plan. This can be especially helpful if you need time to catch up on taxes or missed payments.
Chapter 13 can also stop lawsuits, foreclosures, and creditor harassment, giving you space to rebuild while still doing business.
When a Sole Proprietorship Can Help Save Your Business
If your business is structured as an LLC or corporation, filing bankruptcy becomes more complex. In many cases, the business must be closed or liquidated. But a sole proprietorship allows you to include business debts in your personal bankruptcy and possibly keep your business alive.
Here’s why restructuring as a sole proprietorship might help.
- It simplifies the bankruptcy process: Since the business is tied to you, you don’t need to file a separate business bankruptcy.
- It allows you to keep operating: In many cases, you can continue running the business during and after the bankruptcy.
- It discharges personal guarantees: Many business loans are backed by personal guarantees. Filing as a sole proprietor allows you to discharge those debts through personal bankruptcy.
- It’s cost-effective: There’s less paperwork and fewer legal costs than filing for business bankruptcy as a corporation or LLC.
Speak With an Attorney Before You File for Bankruptcy
If you’re overwhelmed with debt and unsure how to move forward, understanding your options and business structure are key. Whether you’re considering Chapter 7 bankruptcy or Chapter 13 bankruptcy, restructuring as a sole proprietorship can sometimes make it easier to protect your livelihood and get a fresh start.
Before making any decisions, talk to a bankruptcy attorney who understands how to handle business-related debt. Every case is different, and the right strategy depends on your specific situation, assets, income, and goals.
If you’re facing tough financial decisions, don’t wait. Contact a bankruptcy lawyer today to explore your options and protect your future.