A Bankruptcy Primer for Small Business Owners

A hefty amount of debt linked to your small business may force you to consider reorganizing you finances, assuring that your personal responsibility for business debt is limited, or dissolving your business entirely. Filing for Chapter 7, 11, or 13 bankruptcy protection can be avenues to consider depending upon what your desired end result.

You should be aware that you will be personally liable for incurred business debts if you are a sole proprietor of a business or if you are a partner in a business enterprise. Unpaid business debts could conceivably be satisfied by the seizure of your personal assets. The exception to this condition is the LLC scenario which means "limited liability corporation". Limited partners and corporations are not generally held accountable for the debts of a business. Creditors will be limited to the seizure of business assets only.

The pros and cons of bankruptcy laws encompassing chapter 7, 13, and 11 filings should each be reviewed by you and a professional so that you can make an informed decision about which avenue personally suits your situation.

CHAPTER 7 protection can be used by limited liability partners and corporations to usually close a business permanently. No exemptions are allowed. Bankruptcy trustees will take all available assets and sell same to satisfy outstanding debts. IF you have incurred PERSONAL DEBT on behalf of the business, you are still liable for payment of those debts. Many LLC partners also file for personal bankruptcy to relieve themselves of those debts.

Sole proprietor businesses can not avail themselves of Chapter 7 bankruptcy protection. If you are the sole owner of a business then the debts of the business are also your personal debts. You will have to file for PERSONAL bankruptcy to extinguish your debts. The advantages to this are that exemptions are allowed and you may roll in personal debts with those of the business proper. You may also conceivably be able to continue running the business.

CHAPTER 13 protection is NOT available for businesses. IF, however, you are the sole proprietor of a business, then you and your business are one in the same. So if you "personally" file for Chapter 13 protection, your business debts will automatically be included. Likewise, personal liability debts incurred on behalf of the business can also be discharged. The goal of Chapter 13 protection is for you to keep your assets and reorganize your finances through an approved repayment plan.

CHAPTER 11 protection is available to both individuals and businesses. It is, however, a much more complicated process. Chapter 11 is a "business reorganization bankruptcy". Businesses who wish to continue operation throughout the reorganization process turn to Chapter 11 protections. It is more expensive than a Chapter 13 bankruptcy and also requires periodic filings of operational reports relevant to the continued business operation. A creditor's committee must also be assembled. Your creditors will have to approve your proposed plan before it is confirmed by a court. Businesses with debts under $2,343,300 can qualify as a small business debtor and these Chapter 11 proceedings can be expedited because a creditor committee is not a requirement and there will be fewer hearings to complete the process. Chapter 11 protection is usually not used by individuals because Chapter 13 provisions are more advantageous. There is an exception, however. If your secured debt exceeds $1,081,400 and your unsecured debt exceeds $360,475 you CANNOT file for Chapter 13 protection. You will have to file Chapter 11 bankruptcy paperwork.

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