Owning a business does not mean you cannot run into personal financial problems. Most self-employed individuals often wonder whether they can keep their businesses running even after filing for personal bankruptcy. In most situations, you can file for personal bankruptcy and keep your business alive. Unfortunately, filing for bankruptcy could be more complicated at times, and you could also lose your business. While personal bankruptcy can relieve overwhelming debt, you need to consult a bankruptcy attorney to help you understand its possible impact on your business.
Understanding Personal Bankruptcy
Personal Chapter 7 Bankruptcy is typically a legal procedure where you liquidate all nonexempt properties and use the proceeds to pay your creditors. Chapter 13 Bankruptcy would instead involve making specified monthly payments to a bankruptcy trustee, who will, in turn, repay your creditors. You can file for bankruptcy under Chapter 7 or Chapter 13. Chapter 7 bankruptcy involves liquidating your assets and using the proceeds to repay your creditors. Chapter 13 bankruptcy involves creating an affordable monthly repayment program whereby you will remit some money every month towards your debt repayment. If you feel overwhelmed by consumer debt, including payday loans and credit cards, and you have no hope of repaying that amount in full, bankruptcy is worth exploring.
Most personal Chapter 7 Bankruptcies take less than 6 months, especially if it is your first time declaring bankruptcy. If you earn an income above the threshold limit set by the federal government and opt to do a Chapter 13 Bankruptcy, your plan will likely be for 3-to-5 years.
Personal Bankruptcy And Business Debt
Personal bankruptcy can negatively influence your ability to secure credit in the future. Filing for personal bankruptcy can affect your credit score if you have outstanding business debts. Generally, a good credit score is essential when applying for vendor credit, lines of credit, or business loans. Qualifying for a business loan is hard; you will be subject to potentially higher interest rates as you rebuild your credit and probably need to put up collateral. Therefore, you must consider how filing for personal bankruptcy could influence your ability to secure credit in the future and plan accordingly.
Personal bankruptcy can assist you in wiping the slate clean and starting over if you have too much debt to handle. Usually, the effect of personal bankruptcy on your business will depend on how you have organized it. It will also depend on the kind of bankruptcy you have chosen. If you are considering filing for personal bankruptcy and are unaware of what could happen to your business or its assets, consult a skilled bankruptcy attorney to assist you in exploring the options that can protect your business assets.
The Effect Of Chapter 7 Bankruptcy On Your Business
Sometimes, you could lose your business if you file for Chapter 7 personal bankruptcy. However, there are some exceptions. You can retain your business but sell some of its assets under Chapter 7 bankruptcy. Unfortunately, selling some of your business assets could put your company in trouble. You risk losing your business if the Chapter 7 bankruptcy trustee sells the following:
- Your company
- Your ownership interest.
- Any crucial asset required to run the business.
How Chapter 7 Bankruptcy Works
You do not have to lose everything if you file for Chapter 7 bankruptcy. You should designate certain assets as ''exempt,'' and once your case ends, you will have spared some assets to help you start afresh. You must turn over all nonexempt assets to the Chapter 7 bankruptcy trustee for the forgiveness of most or all of your debts. The trustee will sell the nonexempt assets and use the money to repay your creditors.
Keeping Your Business Alive Using Personal Bankruptcy Exemptions
Exempting your business or its assets is essential to maintaining it after filing for Chapter 7 personal bankruptcy. You will be able to protect the following, depending on the business you run:
- The business itself
- The entire products, equipment, and other essential assets for business operations
- Business ownership interests like company shares
You must confirm the exemptions available in your area or where your assets are located to know if you can protect your business using bankruptcy exemptions. Some states allow you to choose between federal and state exemptions.
It can be hard to protect everything you need, but saving some of your crucial assets is possible. Generally, exemptions cover a retirement account, a modest vehicle, household furnishings, clothing, and some equity in your residence. Other exemptions are available too. For example, most states will let you protect ‘’tools of the trade’’. These are personal assets used to carry on a profession or trade, including:
- An Attorney's Library of Law books
- A work truck, or
- Tools for a mechanic
Additionally, you can enjoy a wildcard exemption that allows you to protect any asset you choose, including corporate shares. The value is always restricted to a certain dollar figure depending on what state you live in.
Business Assets That You Can Exempt Under Chapter 7 Personal Bankruptcy
You can take advantage of exemptions that cover particular business assets, though they are not common. The following are the assets you can consider exempting:
- Sole proprietorships — Under this business structure, the business assets you will want to exempt are customer lists, accounts receivable, products, and equipment, among others. You will need to protect the company's value if you feel it is more profitable to sell the company itself. Additionally, a trustee cannot sell your future services if your business is solely based on your labor.
- If partners own the property, exemptions also exist. Unfortunately, since you will be filing for bankruptcy, the exemptions will not apply. In this case, you need to contact a local business bankruptcy attorney to help you understand how the exemption statutes will apply in your situation.
- Under corporations and Limited Liability companies, you can exempt your ownership shares or interest. Typically, you can exempt the whole company if you are the sole shareholder. However, there are only a few exemptions that could cover these assets.
Business Structure And Chapter 7 Personal Bankruptcy
Your business structure determines what you need to protect when you file for bankruptcy to ensure the continuity of your business. The main business structures include:
Sole Proprietorships
You are running a sole proprietorship business if you are not an incorporated or partnership business. For example, a carpenter can run a business such as ‘’Watson’s Cabinet Shop." Under Chapter 7, personal bankruptcy, there is no difference between your debts, assets, and those of the business if you operate a sole proprietorship business. Your business's liabilities and assets are included in the bankruptcy filing since there is no legal difference between you and your business. In this case, creditors can come after your assets or business to recover their debts. In some cases, this can jeopardize your business and lead to its closure. Therefore, if you decide to venture into a sole proprietorship, you must consider how bankruptcy could influence your business and what you must do to protect it.
To protect your business assets under this structure, you can convert a sole proprietorship into a different business structure, like an LLC or a corporation. LLCs and corporations are separate legal entities from their owners. Under the LLC and corporation statutes, liabilities and assets are not included in personal bankruptcy filings.
Partnerships
Partnerships are usually hard to operate, and just like a sole proprietorship, each partner is responsible for business debts. Therefore, in this case, the debts will be included in your bankruptcy. The bankruptcy will free you from the liability to pay much of the business debt.
Typically, most partnership agreements are governed by clauses. If any of the partners files for bankruptcy, the clauses will be used to dissolve the partnership. You need to consult a bankruptcy attorney because litigation from a partner filing for bankruptcy is relatively common.
Corporations And Limited Liability Companies
If your business is a PC or LLC, then you are a separate entity from the company. The company owns the accounts receivable, inventory, and equipment. You do not personally own all the assets, but you own shares or stock.
Selling The Company Or Assets Under Chapter 7
You must know what to do with the assets you cannot protect. The Chapter 7 trustee can sell or abandon nonexempt assets. Before selling an asset, the trustee will determine if selling the asset will fetch a significant amount to benefit the creditors. If the trustee establishes that selling the assets will not generate a sufficient amount, the trustee will consider the asset or business burdensome to the bankruptcy estate and release the asset back to you or abandon it.
The factors that the Chapter 7 trustee will consider include:
If The Asset Can Be Sold
Some assets can be traded freely, while others restrict their transfer. For example, if a family closely holds a corporation, only family members can own the stock.
If You Can Buy Back The Company From The Trustee
The trustee will assess if you can secure a loan to repurchase the company or substitute the exempted assets.
If The Trustee Will Have To Operate The Business While It Is Up For Sale
If the bankruptcy court allows the trustee, he/she will operate the business if there is a probability of maximizing the value for the creditors. Sometimes, the trustee could decide to operate the business to liquidate inventory.
The Effort Required To Sell The Company Or Assets
The trustee could incur more costs to maintain the company if it takes longer to sell. In this case, the bankruptcy trustee could return the company to you.
If It Is A Personal Services Business
Businesses like personal training or mobile window repair services that rely solely or primarily on personal services offered by the debtor often have little that a trustee can sell.
Why You Should Seek Professional Guidance On Personal Bankruptcy
Personal bankruptcy is a complicated legal procedure with long-term repercussions, particularly if you own a business. Unfortunately, some individuals file for personal bankruptcy without consulting a bankruptcy attorney, and as a result, they end up losing their businesses. Therefore, you should seek professional guidance from a skilled and competent bankruptcy attorney, despite what others advise you.
An attorney can assist you in navigating the personal bankruptcy process and making the right decisions regarding your bankruptcy and finances. Your attorney could also assist you in understanding the effect of personal bankruptcy on your business and provide remedies to protect your business and assets. It is necessary to seek the services of an attorney who has experience and understands business owners and their unique challenges.
A bankruptcy attorney will also assist you in exploring options for personal bankruptcy and ensure that you make the right decision for your business.
Options For Personal Bankruptcy
Bankruptcy cannot work for everyone; some will experience a positive impact after filing for personal bankruptcy, while others will face negative consequences. Personal bankruptcy works best for individuals that are able to refocus their finances in the future and keep everything running smoothly.
You can always explore other options if you do not want to file for personal bankruptcy but want to clear your debts. The first alternative is to reorganize your debt. This involves bargaining with creditors to reduce payment terms or interest rates. The second alternative is to consolidate your debt. This involves combining many debts into one loan with a lower interest rate. The above options can assist you in lowering your debt and avoiding personal bankruptcy if it does not make sense.
Find A Bankruptcy Attorney Near Me
Personal bankruptcy can substantially affect your business and your ability to secure business credit in the future. You, therefore, need to reach out to an expert or a skilled bankruptcy attorney to educate you on the possible consequences before you file for personal bankruptcy. At Modesto Bankruptcy Attorneys, our attorneys are always available and ready to help you understand how bankruptcy works. Our attorneys will help you file for personal bankruptcy while protecting your business since we understand every aspect of California bankruptcy laws. We are qualified as a full-service law firm that has assisted many clients for decades. We are committed to offering you personalized attention, comprehensive advice, and sound legal strategies. Call us today at 209-314-3010 to speak to one of our attorneys.
