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3 Bankruptcy Options For Small Businesses

If your small business has a significant amount of debt, filing for bankruptcy could be the right path to take. Bankruptcy can help you reorganize your debts and might even assist you in saving your business. Bankruptcy can help you liquidate your company or eliminate personal liability for business debts. Depending on your specific needs, you may either file a personal bankruptcy, business bankruptcy, or both. First, it is important to understand what business debts you can be held responsible for.

A sign in front of a business that reads "Sorry, we're closed"
Photo by Tommaso Galli

 
Sole proprietors or general partners are considered personally liable for the obligations of the small business. In other words, if the company does not pay off its debts, creditors are allowed to take your personal assets as payment. However, limited partners or those with a limited liability company (LLC) are usually not personally responsible for the debts of their business.
Depending on you business, debts, and goals, it is likely that either a Chapter 7, 11 or 13 bankruptcy is your best option.

Chapter 7 bankruptcy

A Chapter 7 bankruptcy can be filed either by an individual or a business entity. Individuals that own a partnership, corporation, or LLC can file for Chapter 7 on behalf of the business. This type of bankruptcy is used primarily to shut down and liquidate a business, since the company does not receive a discharge and cannot use exemptions. Chapter 7 is typically a desirable option for small business owners who want to close their business and do not want to deal with selling assets or negotiating with creditors. However, this form of bankruptcy will not eliminate your personal obligations on business debts.
If you are a sole proprietor, you must file a personal bankruptcy to eliminate your business debts. Because a sole proprietorship is not a separate legal entity from its owner, all business assets and debts are also debts of the individual business owner. With this type of bankruptcy, you can take care of both personal and business debts, use exemptions to protect business assets, and continue operating the business even after bankruptcy.

Chapter 13 bankruptcy

A business cannot file Chapter 13 as a separate entity, so you must file Chapter 13 as an individual. It is a good option for sole proprietors with a large amount of assets because Chapter 13 bankruptcy is designed to let you keep all property and reorganize your debts through a repayment plan. Chapter 13 bankruptcy also allows other small business owners to discharge personal liability for business debts, so for those who don’t qualify for Chapter 7, it is a viable option.

Chapter 11 bankruptcy

While both individuals and businesses can file Chapter 11 bankruptcy, but it is much more complicated than Chapters 7 and 13. Chapter 11 is known as the business reorganization bankruptcy. It is useful for business owners who want to continue operating their businesses while reorganizing their debts through a repayment plan. Chapter 11 is generally more expensive and complex than a personal Chapter 13 reorganization, and has more requirements such as filing ongoing operating reports. Personal Chapter 11 bankruptcies are rare because better alternative typically exist under Chapter 13 for individuals.
For more information about small business bankruptcy, make an appointment with Anthony Deluca, an experienced Las Vegas bankruptcy attorney.

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