Filing for bankruptcy carries with it a negative stigma. However, you get a second chance to start life with a new slate on the bright side.
However, if you have a business, you may be wondering how filing for bankruptcy can affect your business. The downside here is that filing for personal bankruptcy can negatively affect your business. The good news is that you can mitigate these adverse effects, and with hard work coupled with smart strategies, your business will thrive. In this blog, we will explain to you how filing for personal bankruptcy can affect your business.
What Will Happen to your Business if you File for Personal Bankruptcy?
Filing for personal bankruptcy may affect your business negatively. However, the effects of filing for personal bankruptcy on your business will depend on how it is structured, whether it is a sole proprietorship, partnership, limited liability company, or corporation. Moreover, what will happen to your business after filing for bankruptcy will depend on the type of bankruptcy you've chosen, whether it is a chapter 7, chapter 11, or chapter 13 bankruptcy.
Regardless of the adverse effects of filing for personal bankruptcy on your business, you can easily mitigate them with the help of an experienced bankruptcy attorney. Do not let the fear of your business being negatively affected stop you from filing for bankruptcy and beginning life with a new slate.
How your Sole Proprietorship Business may be Affected
A sole proprietorship business is a business that is not separate from its owner. Sole proprietorships are run by only one individual.
If you have a sole proprietorship business, you have been definitely filing the income and losses of that business in your personal tax return. When filing for personal bankruptcy, you'd have to include the assets of your sole proprietorship business in your application.
This means that the Bankruptcy Trustee can administer and sell the assets of your sole proprietorship business. If this happens, you will lose your assets and suffer a huge financial loss.
How your Partnership Business may be Affected
A partnership business is run by two or more individuals. How filing for personal bankruptcy may affect your business will depend on the partnership agreement between you and your partners.
Legally speaking, a partnership is a separate entity from its owner. Filing for personal bankruptcy will not affect your partnership business in any manner whatsoever.
However, depending on the partnership agreement, your co-partners may require you to surrender your interest in the partnership. If this happens, you will get back all the money and assets you had invested into the business. In turn, the Bankruptcy Trustee may administer and sell these assets. This means that you may end up losing your business and all the assets that you had invested into it.
How your Limited Liability Company may be Affected
Just like a partnership, a limited liability company is separate from its owners. Therefore, filing for personal bankruptcy will not affect your business in any manner whatsoever.
However, depending on your company's constitution, your co-shareholders may require you to surrender your interest in the company. If this happens, you will lose your business together with all the money and assets that you had invested into it.
If you are the director of the company, you may be forced to resign. This is because California law prohibits bankrupt individuals from holding office as directors of companies.
How your Corporation may be Affected
Like partnerships and limited liability companies, a corporation is deemed a separate entity from its owners. Filing for personal bankruptcy will not affect your corporation in any manner whatsoever. In fact, your co-shareholders will not even require you to surrender your interest in the corporation.
However, you may be forced to resign if you are a director of the corporation. As a result, you will partly lose control of how the business is managed.
How a Chapter 7 Bankruptcy may Affect Your Business
Remember, you may end up losing your business if it was a sole proprietorship, partnership, or limited liability company after filing for bankruptcy. But, this will only happen if the Bankruptcy Trustee sells the business itself or its assets or if you lose your ownership interest in the business.
Note that there are different types of bankruptcies in California. Besides Chapter 7 Bankruptcy, you can also file for either Chapter 11 Bankruptcy or Chapter 13 Bankruptcy. Each type of bankruptcy will affect your business in distinct ways.
If you file for Chapter 7 Bankruptcy, you may be able to protect your business. You can do this by exempting certain assets in your bankruptcy application. This way, you will restrict the Bankruptcy Trustee from administering and selling these assets. In turn, you’d have the assets to continue running your business after you’ve been discharged from bankruptcy.
You may not be able to protect everything you may need. However, you will be able to keep the assets that are essential to running your business.
If you are a sole proprietor, you may want to exempt all the assets of your business. This is possible with the help of a highly skilled and experienced bankruptcy attorney.
If you run a service-based business, you'd be in the clear because the Bankruptcy Trustee is not permitted to sell future services. As long as you exempt your business equipment, your business will not be affected.
How a Chapter 11 Bankruptcy may Affect your Business
In comparison to chapter 7 bankruptcy, a chapter 11 bankruptcy has fewer adverse effects on your business. In a chapter 7 bankruptcy, the Bankruptcy Trustee will sell your business assets unless you exempt them. However, a chapter 11 bankruptcy will enable you to reorganize your debts so that you can continue running your business, besides permitting you to exempt certain business assets.
In a nutshell, you will receive the following benefits after filing a chapter 11 bankruptcy:
- You will be able to exempt property required to continue running your business
- You will be given time to dispose of assets that you don't need or cannot afford to maintain or keep
- You will be allowed to come up with a debt restructuring plan that will modify your debtors’ payment terms and conditions
- The court will discharge all the debts that you cannot pay under your debt restructuring plan
However, filing for Chapter 11 bankruptcy is expensive and time-consuming. If you are a small business owner, a chapter 11 bankruptcy may not be the best option for you.
How a Chapter 13 Bankruptcy may Affect your Business
A chapter 13 bankruptcy is quite similar to a chapter 11 bankruptcy. Both of them will enable you to restructure your debt. However, filing for Chapter 13 bankruptcy is cheaper and less time-consuming. This makes it the best option for small business owners who want to keep their businesses afloat.
In a chapter 13 bankruptcy, you will be allowed to keep all your assets. The Bankruptcy Trustee will not administer or sell any of your assets. But, you will be expected to come up with a 3 - 5 year period payment plan. The court will expect you to comply strictly with this plan. When the three or five years lapse, whichever is the case, the court will discharge your remaining debts.
This way, your business will remain afloat, and you can continue running it after filing for bankruptcy. Compared to chapter 7 and chapter 11 bankruptcy, chapter 13 bankruptcy is most suitable for business owners who want to keep their businesses afloat.
Cramming Down Business Loans when Filing for Bankruptcy
You may have probably decided to file for personal bankruptcy because you could not pay back your business loans. This is especially true if you are a sole proprietor and you've got creditors at your back doing whatever it takes to recover their debts against your business.
If you intend to cram down your business loans, the best bet for you would be a chapter 13 bankruptcy. A chapter 13 bankruptcy will enable you to reduce the amount of your secured business loans to that of the value of the secured collateral.
For instance, let’s say you took out an equipment loan for $30,000. You secured the loan with your car, which is worth $15,000. Under chapter 13 bankruptcy, you can cram down this equipment loan to $15,000.
Once you’ve crammed down your business loans, you can repay them as per your debt repayment plan. Moreover, a chapter 13 bankruptcy can help you reduce your interest rate on these loans. This way, you’d be able to pay back your loans more easily. In the long run, your business will become solvent.
Using the Wild Card Exemption to Protect your Business
Remember, under chapter 7 bankruptcy, you are permitted to exempt certain property from being administered and sold by the Bankruptcy Trustee. The only properties you can exempt under chapter 7 bankruptcy are the assets and essential tools you need to run your business. It is not possible to exempt all the assets of your business.
The Wild Card Exemption permits you to exempt certain specific assets from being administered and sold by the Bankruptcy Trustee. With the Wild Card Exemption, you can protect valuable property in your business. Thanks to it, you can save some of your business assets so that your business can remain afloat even after you've filed for bankruptcy.
For example, you can use the Wild Card Exemption to protect sentimental property, such as the first printer you bought when setting up your tech business. However, just like under chapter 7 bankruptcy, you cannot exempt all your assets. Both Federal Law and California Law limit the value of the assets you can protect with the Wild Card Exemption.
The Wild Card Exemption does not limit you to protecting only certain kinds of property. You can choose which property you would like to exempt, whether your car, money, expensive artwork, or business equipment.
What if you Want to Close your Business after Bankruptcy?
Depending on your situation, you may want to close your business after filing for personal bankruptcy. If this is the case, the best route to take would be filing for Chapter 7 bankruptcy.
When you file for chapter 7 bankruptcy, the Bankruptcy Trustee will sell all your assets except those which you've specifically exempted. The Bankruptcy Trustee will use the proceeds from the sale to repay your creditors. Then, you will receive a discharge from the court. After you've received a discharge, you'd be able to start life on a clean slate since there will be no outstanding debts against you.
On the other hand, if you file for chapter 13 bankruptcy, you will be obliged to develop a debt repayment plan to repay all your creditors. Under this plan, you will be expected to reimburse your creditors a fixed amount of money after a specific period. This might not be easy for you, especially if you had depended on your business as your sole source of income. Remember that the Bankruptcy Trustee still has the power to sell all your assets under chapter 13 bankruptcy.
Under chapter 7 bankruptcy, you can exempt certain assets from being sold by the Bankruptcy Trustee. Even though the proceeds from the sale by the Bankruptcy Trustee may be insufficient to repay all your creditors, you will still receive a discharge from the court. With the help of a chapter 7 bankruptcy, you will be able to close down your business with no outstanding debt. This makes it the most viable option for individuals who would like to close their business after filing for personal bankruptcy. On the flip side, if you would like your business to remain afloat, the most viable option for you would be a chapter 13 bankruptcy.
Starting a New Business after Filing for Personal Bankruptcy
Starting a new business after filing for personal bankruptcy may be challenging, but it is doable. In fact, it is much easier to start a new business after bankruptcy than to continue running your business when you are burdened with debts.
First, you ought to decide the type of business you intend to start, whether it is in the same line of business as your previous business or a different one altogether. Most individuals who intend to start a business after bankruptcy usually choose a business similar to their former businesses, especially if they had successfully exempted certain business property from being sold by the Bankruptcy Trustee.
Next, you can come up with a business plan and start looking for capital. As a discharged bankrupt, it may be difficult for you to get business loans. This means that you may have to look for other sources of capital, such as your personal savings and financial assistance from friends and family members. But, you can still get a business loan if you manage to improve your credit score.
Also, if you were running a sole proprietorship, you may consider changing your business to a partnership, limited liability company, or a corporation. As illustrated earlier, personal bankruptcies have more adverse effects on sole proprietorships than partnerships, limited liability companies, and corporations.
Because you had filed for bankruptcy, you'd be able to start your business with a clean slate. Filing for bankruptcy gives you a second chance to work on your finances. If you employ the right strategies, your business will thrive and flourish.
Exploring the Alternatives to Bankruptcy and Their Impacts on your Business
Filing for bankruptcy is not the only sure way to get out of debt. You can consider other alternatives, too.
For instance, you may opt to negotiate with your creditors. The outcome of these negotiations might be a new debt repayment plan or a reduction in the amount of debt you owe them. This way, you'd be able to settle your debts and continue running your business comfortably. If you are not confident with your negotiation skills, you may seek help from a bankruptcy attorney or a credit counseling agency.
If your sole intention is to stop creditors from harassing you, then you should take advantage of both Federal and State Debt Collection Laws to prevent the abuse. A bankruptcy attorney can help you file a motion at the courthouse to stop your creditors from harassing you.
If you are too deep in debt and you don't have any valuable assets - and you don't expect owning one any time soon, it would be best for you to take no action at all. Your creditors cannot enforce their claims against you; they are not permitted to attach and sell your personal belongings, ordinary household items, or social security benefits. Likewise, the Bankruptcy Trustee has no power to attach and sell these items.
Find a San Diego Bankruptcy Attorney Near Me
If you are a business owner and you would like to file for bankruptcy, we invite you to contact us at the San Diego Bankruptcy Attorney for professional legal help. We will help you explore the most viable option for your situation. Call us today at 619-488-6168 to get started.
