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Sole proprietorships and bankruptcy

| Jul 23, 2020 | Business Bankruptcy |

Business owners face many challenges, whether they own a retail store, restaurant or manufacturing facility. One complication that they hope they never have to face is the bankruptcy of their business. Unfortunately, many companies eventually go bankrupt, many within a few years of starting, but some go sour after a long and fruitful run.

There are no financial boundaries between personal and business obligations for owners using a sole proprietorship model. So the owner becomes personally responsible for debts incurred by the business. Conversely, if they have money problems at home, creditors can go after the business’s assets to repay those personal debts.

Filing bankruptcy protection

While sole proprietors may file Chapter 11 business bankruptcy, the owner may find it more advantageous to file personal bankruptcy. The circumstances of each situation are different, but there are two main options:

  • Chapter 7: This is the liquidation option where a trustee will sell non-exempt assets (including business assets) to settle as many debts as possible, and it gets rid of all unsecured debt. This occurs over three to six months.
  • Chapter 13: While most businesses cannot file Chapter 13, sole proprietorships can. It may allow the owner to restructure, keep their business open and keep more assets than Chapter 7. This works if the business can provide enough income to pay off the debts within three to five years.

The advantages of bankruptcy

Bankruptcy provides an automatic stay on all debt collection, which often stops foreclosure and repossession of your property. Some walk away with very little after Chapter 7, but the debt is wiped clean. Others restructure the business and try to make it successful. Each has its benefits, which the owner should weigh with guidance from bankruptcy attorneys.

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