When considering whether to file a personal bankruptcy, a central issue for small business owners is how this filing will affect their business. Many business owners who seek to continue operating their business avoid filing bankruptcy because of this concern even when they need a relief from insurmountable personal debt. The answer to the question regarding the level of protection that their business will have depends on numerous factors such as whether the business is incorporated and whether the business has assets.
Most small businesses are proprietorships or general partnerships. Because these businesses are unincorporated, they do not have an identity that is separate from that of the owner. This means that the unincorporated business cannot separate business assets and debts from those that are personal and the debts of the business are in fact the personal liabilities of the owners. This can work in favor of the business owner who is seeking to close their business through a bankruptcy filing because it can discharge their business debts right along with their personal debts. However, many business owners are seeking to discharge their personal debts while allowing their business to remain in tact.
A business with no assets may be able to file a Chapter 7 without a loss to the owner because where there are no assets there is nothing to liquidate. This is less feasible for a business that has assets such as equipment and inventory. It is for this reason that a service provider tends to be in a better position to file a Chapter 7 than a provider of goods who is more likely to have assets associated with their business.
Where the business owner has unexempt assets they are often better served by filing a Chapter 13 as opposed to a Chapter 7. A Chapter 13 generally permits individuals to keep their property by repaying creditors out of their future disposable income. The Chapter 13 debtor proposes a repayment plan which must be approved by the bankruptcy court. They then pay the amount set forth in the plan to the Chapter 13 trustee, who distributes the funds to creditors. The Chapter 13 debtor receives a discharge of most debts after the debtor completes the payments required under the plan. This would be advantageous to a small business owner who has assets because they can reorganize their debts without liquidating their assets.
For business owners who have incorporated their business, it is best to consult with both a bankruptcy attorney and a corporate attorney as the value of their shares in the business would have to be determined prior to determining their best course of action.