Can Filing for Bankruptcy Hurt My Business?

As with many other legal issues, there isn’t a one-size-fits-all answer to how bankruptcy may affect your business. It depends on many factors, including, but not limited to, the business structure and the type of bankruptcy filing.

In some cases, you might not have a viable plan to continue operating your business and will subsequently need to close. Other times it may be possible to continue operating your business. Let’s review some choices a business owner has when filing for personal bankruptcy.

What’s the difference between Chapter 7 and Chapter 13 bankruptcy?

There are two common pathways when filing for bankruptcy. The first option is Chapter 7 bankruptcy. It focuses on liquidation, and a trustee can sell all non-exempt property to pay creditors and discharge qualifying debts. A Chapter 7 bankruptcy can stay on your credit report for 10 years.

The other option is to file for Chapter 13 bankruptcy. It focuses on reorganizing your debt into a more reasonable payment plan. A person can keep their property and business as long as they are compliant with the plan. A Chapter 13 bankruptcy is listed on your credit report for 7 years.

Which option is best for you? Because there are so many variables, it’s best to consult a bankruptcy lawyer to determine which bankruptcy filing is the best option for your situation.

Filing bankruptcy as a sole proprietor

In a sole proprietorship, there is no difference between your personal assets and debts and those of the company. While it may be possible to exempt some business property, a bankruptcy filing from a sole proprietorship will often include business assets. In this scenario, this usually means business assets are sold to cover your personal debt. This could essentially lead to the dissolution of your company.

A sole proprietorship could cause an individual to lose their business. However, this could potentially have been avoided if the owner had gone through the process of creating a legal structure like a limited liability company (LLC).

Filing bankruptcy as a partnership, corporation, or LLC

Several legal structures allow a business to operate separately from the individual. Here are a few of those options and what could happen if you file for bankruptcy:

  • Partnership: A partnership is when two or more people own a business together. If you file for bankruptcy while in a partnership, you might have to sell your interests to the business to pay off your personal debt. The partnership itself doesn’t become involved in the personal bankruptcy process.
  • Corporation: Corporations are separate entities from the business owners, and a personal bankruptcy filing will not impact the business.
  • LLC: To protect the business from a personal bankruptcy filing, other shareholders may ask you to sell your interests in the company.

Whether you have a partnership, corporation, or LLC, it’s wise to ensure the appropriate assets are exempt from a personal bankruptcy filing. A bankruptcy attorney can help you determine what is possible within your state laws.

Seek help from bankruptcy attorneys

Filing for bankruptcy is an opportunity to get control of your financial situation and gives you a chance to have a fresh start.

The bankruptcy process is complicated, but our qualified bankruptcy lawyers are ready to help you. We’ll assist you with every step, including finding a pre-bankruptcy counseling program in Lebanon, PA or at a location near you. Our qualified attorneys will prepare all of the necessary paperwork and file a petition with the court. The process can take 4-6 months, and our lawyers will keep you informed about the progress.

If you have any questions, contact us today or call us at 717-274-2644 to schedule a confidential consultation. Our attorneys are ready to assist you.