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Personal bankruptcy and business owners

On Behalf of | Nov 21, 2022 | Chapter 7 Bankruptcy

Business owners may face complexities when filing for bankruptcy, depending upon how they set up their enterprises. The rules for Chapter 7 liquidation bankruptcy might affect one California business way and another differently. Business owners struggling with excessive debt might wonder how to approach bankruptcy, with some wondering if personal bankruptcy remains an option.

Chapter 7 and personal bankruptcy

Business owners who file tax returns as sole proprietors could file for personal bankruptcy under Chapter 7. After all, by designating oneself as a sole proprietor, the person indicates they and their business are one and the same. Such would not be the case when filing as an LLC, partnership or corporation. In those situations, the business files Chapter 7, not the individual owner.

A serious concern may arise among those LLCs, partnerships and corporations when considering Chapter 7. Chapter 7 involves liquidation bankruptcy, a process that sells all non-exempt assets to pay creditors. Invoking Chapter 7 for personal bankruptcy allows the business owner to continue running the enterprise. When a business files for Chapter 7, the business closes its doors and ceases operation.

Be aware that unsecured debt could face discharges in Chapter 7, meaning the debtor has no obligation to pay the debts. However, those seeking Chapter 7 protections must pass a means test to qualify.

Other options for business owners

Business owners face no exclusive mandates to file Chapter 7 bankruptcy in California. Chapter 11 bankruptcy allows a business to remain operational, allowing the business owners to work at correcting mistakes that led to financial problems. Filing for Chapter 11 would stop collection actions and may result in some debt being discharged. However, those filing for Chapter 11 would have to accept a payment plan with their qualified debtors.

A governing principle in Chapter 11 suggests an operational business allows the company to earn revenue. Those revenues may pay creditors listed in the repayment plan.

Some business owners might file for Chapter 7 personal bankruptcy when plagued by debts. However, others might file for bankruptcy in their company’s name.