Business Bankruptcy: How Does a Business Bankruptcy affect the Business Owner Personally?

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Business Bankruptcy: How Does a Business Bankruptcy affect the Business Owner Personally?

Business Bankruptcy Lawyer in Philadelphia

Did you know that more than 400,000 businesses went bankrupt in 2021 alone? There are many reasons a business bankruptcy might occur, but it always has to do with being unable to pay off certain debts. You might wonder what you should expect if you’re thinking about going through a corporate bankruptcy. 

Of course, you should have a reasonable bankruptcy attorney on your side, but what else should you know? How does business bankruptcy affect your assets, if at all? And what is the difference between different types of bankruptcies?

Keep reading and learn more about the details below.

Sole Proprietors, Business Partnerships, and Corporations in Bankruptcy 

Bankruptcy affects different business entities in different ways. The type of bankruptcy in the business you file for also makes a difference in your debt. In particular, personal bankruptcy has several differences compared to bankruptcy in corporate settings. 

For example, consider chapter 7 bankruptcy. When filing a chapter 7, the business owner is still responsible for the debt the business has accumulated.

This happens because the business itself is still up and running. Therefore, most people who want to file for chapter 7 bankruptcy prefer to close their businesses beforehand. That way, there is no need for you as the business owner to pay back your business debts because, after all, the business no longer exists. 

But what about sole proprietors? As it turns out, sole proprietors do very well when filing for chapter 7 bankruptcy; they are not only allowed to wipe out their corporate and personal debt simultaneously.

In a way, this is like hitting two birds with one stone. But keep in mind that there are some requirements to file for this type of bankruptcy. In particular, you will need to go through a means test. 

What You Need to Know

However, for sole proprietors who have business debts that are far greater than their debts, they can skip the means test and file for chapter 7 bankruptcy directly. But does this mean you would lose everything if you file for chapter 7 bankruptcy?

Not necessarily. Sole proprietors benefit again because they are allowed to make a few exceptions. In particular, they can choose some business assets (and a few personal assets) to keep exempt. 

But what about other business entities? While other business entities can benefit from filing for bankruptcy, the benefits tend not to be as great as they are with sole proprietors. Most business entities except sole proprietors need to take the responsibility of paying back certain assets, paying back the creditors involved, and so on. 

Because filing for chapter 7 bankruptcy for certain business entities like LLCs or partnerships is not beneficial, these entities tend to not file for chapter 7 bankruptcy. Instead, they usually choose a different form of bankruptcy that offers more benefits for them. 

Personal Guarantees Made on Loans, Leases, or Other Debts

You might be wondering if a business bankruptcy affects your assets. The answer depends on whether or not you have made any personal guarantees on business loans, leases, or other debts. In particular, you might wonder if filing for bankruptcy with the help of your Philadelphia attorney will harm your credit score in any way. 

You may also be liable depending on what kind of business entity you’re running. In this case, you would be responsible for the debt you cannot pay back. On the other hand, if you have not made any personal guarantees or given out personal loans or leases, you will be in much better financial shape.

According to the law, there is little differentiation between your business and you. For example, your debts will be in trouble if you are a sole proprietor. But what about general business partnerships?

If you have an LLC or corporation, your assets and credit score will not be affected when you file for bankruptcy. Also, in this case, you as a partner will still be personally responsible for the debt you need to pay. On the other hand, if you have an LLC or a corporation, you will not have any personal responsibility or assets to pay off if you decide to file for bankruptcy. 

On the other hand, if you have a business entity in which you are personally involved, you will have to pay the price when you file for bankruptcy.

The Details

As mentioned before, you will be responsible for paying off personal and business debts. You will also need to figure out how to distribute the assets used to pay off your debt. 

A safe move, of course, would always be to choose a business entity that removes you from personal responsibility. That way, if you ever need to file for bankruptcy in the future, you won’t have to worry too much about your assets. However, remember that even if you have an LLC or a corporation, you may still be personally liable in some instances.

In particular, if you have provided personal loans, leases, or financial guarantees, these guarantees overstep the power of your business entity. This may affect your assets if someone can prove that you made these personal guarantees after you file for bankruptcy, which is why it’s crucial to have a good lawyer on your side when filing for bankruptcy. 

Without a lawyer, you might not know what to do, and you might not know what assets of yours are in danger. A lawyer will help you sort everything out so you can benefit as much as possible from bankruptcy. 

Chapter 7, Chapter 13, and Chapter 11 Bankruptcy

We have already briefly gone over chapter 7 bankruptcy. Keep in mind that there is not only one type of bankruptcy. Different types of bankruptcy fit better with various business entities and situations. 

As mentioned before, this type of bankruptcy is especially beneficial for sole proprietors because it allows you to protect some of your business and personal assets. Its benefits change depending on whether you are a sole proprietor or another business entity like a corporation. The main downside is that this type of bankruptcy will not allow you to dissolve all of your business debts if you are not a sole proprietor. 

Chapter 13 is not much better when it comes to certain business entities. Business entities like LLCs and corporations are not permitted to file for this type of bankruptcy; instead, individuals and sole proprietors can file for this type of bankruptcy. 

You might wonder why you should ever opt for this kind of bankruptcy if you still have to pay back your debt. But how does it differ from chapter 7 bankruptcy, you might ask? Rather than getting rid of your debts, this kind of bankruptcy reorganizes your obligation to make it easier and more affordable to pay back. 

Other Types of Bankruptcy

Many individuals and sole proprietors prefer to use this type of bankruptcy to keep their businesses open and running. You can also save some things exempt from chapter 13 bankruptcy. Your business, in particular, is considered an asset you can control. 

The downside is that chapter 13 takes a long time to sort out compared to chapter 7. But what about chapter 11 bankruptcy? Most businesses don’t use this type of bankruptcy because it is complicated and it tends to be expensive to deal with. 

Many small businesses are even illegible for filing for this type of bankruptcy. You also need to wait for a creditors’ committee to come together for this type of bankruptcy to proceed. You will also need several other requirements before you can move. 

Because this type of bankruptcy requires so much time and energy, most businesses prefer not to opt for this type. 

All About Business Bankruptcy

Business bankruptcy is serious, and many factors can affect its outcome. For example, you could benefit from filing for chapter 7 bankruptcy if you are a sole proprietor. However, you will be personally responsible for certain factors. 

On the other hand, if you have an LLC or a corporation, you should be free of any personal liability. To learn more about filing for bankruptcy, contact us here.

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