For a business, the purpose of a bankruptcy is to save your business from closing, wipe out any of the owner’s personal liability to the debts owed, or to sell the business. Filing a small business bankruptcy or an owner’s personal bankruptcy can achieve these goals.
- Will Bankruptcy Wipe Out My Debt Liability?
- What if My Business is a Corporation or LLC?
- What Are the Different Types of Bankruptcies?
- Can I Keep My Business After I File for Bankruptcy?
- What Happens to Business Assets in a Chapter 7 Bankruptcy?
- Can Small Business Tax Debt Be Discharged in a Chapter 7 Bankruptcy?
- Do I Need a Lawyer?
This depends on how your small business entity was created and who owns the business. Generally, if you are the sole owner of the small business, then you are personally liable for the debts where the small business does not have enough money to cover the debts. If a few individuals own the small business and you are the general partner, again, you may be liable. But if you are only a limited partner, you may not necessary be liable unless special circumstance arise.
Many people file for a Chapter 7 bankruptcy when they are a corporation or LLC because it is a valuable option for them. When a small business owner runs a business as a LLC or corporation, the LLC or corporation becomes a separate entity. This means that the small business owner would not be personally liable for the debts and liabilities of the corporation. As a result, Chapter 7 liquidation would only sell off the corporation’s assets and not the small owner’s personal assets.
Chapter 7, 11, and 13 bankruptcies are all options. Small businesses and persons can file Chapter 7 and 11 bankruptcies, while only persons can file Chapter 13.
- Chapter 7 bankruptcies are used to shut down and liquidate the business. But by no means does these bankruptcies get rid of the debt or qualify for exemptions.
- Chapter 11 bankruptcies reorganize the small business structure to allow them to continue to operate, while implementing a new repayment plan.
- Chapter 13 bankruptcies is only available to sole proprietors and are used in limited circumstances. The unique feature of this bankruptcy is that it allows the owner to be free of any personal liability to any business debt.
This depends on what type of bankruptcy you plan to file as a small business owner. If you want to file for bankruptcy, but keep your business, a Chapter 7 bankruptcy would not be a good option. In most cases, a small business owner will not be able to operate their business after they file for a Chapter 7 bankruptcy.
When you file a Chapter 7 bankruptcy, a bankruptcy trustee is appointed to liquidate or sell all of your non-exempt assets that have value, which would then be used to pay the debt owed to the creditors. If you are a sole proprietor, the assets that will be sold are all your business assets. One of those assets will include your business property.
If you run your business as a sole proprietor, the business assets legally belong to you. You must list all your personal assets and debts on your bankruptcy papers. Since you personally own the business assets, you must also list these assets on the bankruptcy papers you file. In the liquidation process, these debts will be sold to repay the debts you owe to the creditors. Any business assets of value that you cannot claim as exempt will be sold to repay these debts.
If you are a small proprietor, your business tax will not be discharged in a Chapter 7 bankruptcy. As a small business owner, you are personally liable for all of your business debt, including your business tax debt. Even though a Chapter 7 bankruptcy discharges most business debt, taxes will not be discharged.
In some cases, taxes can be discharged in bankruptcy. Tax debt can be discharged in bankruptcy if:
- The tax debt is more than three years old or
- The tax debt was assessed at least 240 days before the bankruptcy filing, and
- The tax return was filed at least two years before the bankruptcy, and
- The taxpayer has not committed tax fraud or tax evasion
In other words, a tax debt must be more than three years old or assessed at least 240 days before filing for bankruptcy; you only need one or the other, but not both. However, the remaining two requirements must still be met.
Filing for bankruptcy is not a simple task. To succeed in your bankruptcy claim, you should contact a business lawyer. He will assess your case and determine which type of bankruptcy best meets your needs.