If you own a business that is registered as a sole proprietorship, you probably count on your business for personal income. If your business revenue isn’t enough for you to pay your personal and business debts, you may be considering bankruptcy.
Understandably, though, many people worry about what will happen to their businesses. If you file personal bankruptcy, does that equate to small business bankruptcy as well?
By registering your business as a sole proprietorship, you allowed your personal and business finances to become one and the same. When you file bankruptcy, you are not permitted to decide which debts will be included, and which will be excluded.
Your business assets will be listed with your personal assets in the bankruptcy documents. Most business assets are not considered exempt, meaning that you won’t get to keep them. Non-exempt assets become the property of the bankruptcy estate, and will be liquidated to pay your creditors.
In most cases, losing your business assets means you will have to shut down your business.
There are a couple of options that will allow you to keep your sole proprietorship. First, you can file for Chapter 13 bankruptcy instead of Chapter 7. Chapter 13 would allow you to repay your personal and business debt to your creditors over a period of time (usually 3 to 5 years), and would permit you to continue running your business while paying down your debt.
The other option is to incorporate your business before you file your bankruptcy petition. This separates your business finances from your personal finances.
Your newly incorporated business is not automatically safe, though. Your stock (the ownership of the business) will transfer to the estate when you file bankruptcy. The estate can then liquidate your assets and use the money to pay your creditors.
However, you will have the option of purchasing your stock back at market value, which would allow you to keep your business running. Depending on your business’s inventory and other factors, the market value may be less than the debt repayments you’d make under Chapter 13.
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