Everything You Need To Know About Filing Bankruptcy As A Sole Proprietor

Posted by Erick Bohm on February 24, 2017 at 2:38 PM
Erick Bohm

Sole-Proprietor-Filing-Bankruptcy.jpgOperating as a Sole Proprietor can be exciting and stressful at the same time. One of the biggest reasons it can be stressful is because you are personally liable for what happens. Unlike having an LLC, corporation, or partnership, you are personally on the hook for anything that happens. When debts become due, creditors can come after you directly to collect.

Reaping The Benefits

When it comes to being a sole proprietor and needing to file bankruptcy, Chapter 7 or Chapter 13 bankruptcy can be very beneficial. Because you and the sole proprietorship are the same entity, you will personally reap the benefits bankruptcy can provide. The easiest way to think about filing bankruptcy for your sole proprietorship is to think in terms of filing bankruptcy for yourself because ultimately that’s what you’re doing. Everything the business owns, everything the business does, and everything the business owes is tied to you personally. If your name is John Smith and you are a sole proprietor owning ABC Construction, there is no difference between John Smith and ABC Construction. If ABC Construction owes Cred Co. money, John Smith owes Cred Co. money. If ABC Construction owns a truck, John Smith owns the truck. Depending on the extent of your income and assets, there are different benefits available to you based on which chapter of bankruptcy you choose to file.

Protecting Your Assets 

Federal and state bankruptcy laws provide for varying degrees of protection for you and your assets. These protections are referred to as exemptions. When most people think of bankruptcy, they think they’re going to lose everything they have. Well, this simply isn’t true. Bankruptcy exemptions allow individuals and sole proprietors to protect certain amounts of their “stuff”. Most of the time, our clients don’t lose anything through bankruptcy. The ins and outs of bankruptcy exemptions are case specific, but our MN Bankruptcy Attorneys are very knowledgeable when it comes to the exemptions available to protect your assets. Bankruptcy exemptions help protect the assets you own whether they are personal or used in connection with your sole proprietorship. When you use bankruptcy exemptions to protect your assets, you may be able to continue running your business without being at risk of losing business related property.

Filing Chapter 7 Bankruptcy 

Chapter 7 bankruptcy provides you and your sole proprietorship an opportunity to start over fresh. You can break free from overwhelming debt in a matter of months. Bankruptcy exemptions will likely allow you to keep all of your assets and continue operating your business. Now, depending on the value of your assets, you may be at risk of a Trustee liquidating some of your assets to pay towards your creditors. However, if there are assets that we cannot protect with bankruptcy exemptions, we will look into filing a Chapter 13. The most important thing to keep in mind is the fact we have the knowledge and expertise to craft a solution that fits your specific needs.

Filing Chapter 13 Bankruptcy

Chapter 13 bankruptcy is designed to provide the same relief as a Chapter 7, but is designed for people who either make a lot of money or for people who have a lot of value in their assets that we cannot protect in a Chapter 7. Through a Chapter 13, you pay back your debts over a specific period of time. During this time, the debts you are paying back are interest free and do not accrue late fees, penalties, or taxes. Now, you might be thinking the whole idea behind filing bankruptcy is premised on the fact you can’t afford to pay your debts. We get that. When we put together a payment plan for your Chapter13, the payments are ALWAYS something you can afford. If you can’t afford it, we won’t do it. The nicest aspect of filing a Chapter13 is that you get to keep all of your assets. So, if you and/or your sole proprietorship has a lot of assets, you will be able to keep them all through a Chapter 13. This allows you the opportunity to continue operating your business without interruption caused by the loss of business related property.  

Sole proprietorship VS LLC

At this point you might be thinking you should have formed an LLC, or something of the like. Well, there are certainly benefits, but that is not always the best business model. Often times, when operating an LLC, corporation, or partnership, the owners personally guarantee debt. Among other reasons, this is sometimes done to secure more favorable terms on certain types of loans. Well, if you operate your business as a corporation and fall behind on your debts, creditors will go after the corporation to collect on the debt. If the debts were personally guaranteed by the business owner, the creditor can then go after the business owner as well. In this instance, the business owner will need to file bankruptcy on behalf of the business and themselves. Otherwise, the creditor will be able to pursue collection activity against the business and the owner. Depending on how the business is formed, there are different considerations when reviewing your bankruptcy options.

After Recieving Your Discharge 

If you own a sole proprietorship and decide to file bankruptcy, you have options on what to do after you receive your discharge. When operating a sole proprietorship, there is no requirement your business seize to exist after bankruptcy. You may, however, decide it is in the best interest to close the doors, but that is entirely up to you. Bankruptcy will help you clean up unmanageable debt and start over. Often times, sole proprietors will start a new business after declaring bankruptcy. Ultimately, it all comes down to what you want to have happen. If you want to keep fighting the good fight of operating a small business, there’s certainly nothing that says you can’t. However, if you’re enamored by the idea of closing the doors and starting work somewhere else, you can do that too.

Our knowledgeable MN Bankruptcy Attorneys are willing to address any questions you have about the impact bankruptcy has on your sole proprietorship.

Topics: Bankruptcy, Chapter 13, Chapter 7

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