Everything You Need to Know About Bankruptcy & Sole Proprietorships

The Buchalter Law Group

If you’re self-employed, you are liable for both your personal and your business debts. While this might be bad news if your business is unsuccessful, the good news is that you have more bankruptcy options. LLCs, partnerships, and corporations are limited to Chapters 7, 11, and 12, but sole proprietors also have the option of Chapter 13.

If you are a sole proprietor, you will file personal bankruptcy, rather than business bankruptcy. This is because there is no legal distinction between you and your business. As you may already know, the creditors and lenders for your business debts can sue you and, as a result, take your personal assets to cover your business debts.

Whether you file Chapter 7, 11, 12, or 13, the bankruptcy court will either discharge or reaffirm your personal and business debts. Here is a brief overview of how each type of bankruptcy may affect you and your business.

Chapter 7

One advantage of filing bankruptcy as a sole proprietor is that your income may not affect your eligibility for Chapter 7. In other words, if more than half of your debt was accrued through business expenses, you can qualify for Chapter 7—even if your income is too high to pass the means test.

If you file Chapter 7 as a sole proprietor, you may be able to eliminate qualifying personal and/or business debt within 4-6 months. However, both your personal and business assets may be liquidated—unless you can protect them through state or federal exemption laws. Depending on the exemptions you claim, you may be able to reduce your debt without liquidating your assets and going out of business.

Chapter 11

Chapter 11 is available to all types of businesses, as well as certain individuals. If you file Chapter 11 as a sole proprietor, the results may hinge on whether you can qualify for Subchapter V, a section added to Chapter 11 in February of 2020 that is significantly friendlier to smaller businesses. Because your personal assets will be on the line as well, you’ll want as many advantages as possible.

To qualify for Subchapter V, you can owe up to $7,500,000 in secured and unsecured debt, but at least half of the debt you owe must have been accrued through business activities. This debt threshold is the result of a temporary increase per the CARES Act—in March of 2021, it will return to $2,725,625.

The Chapter 11 process involves a reorganization and repayment plan, rather than liquidation, as is the case with Chapter 7.

Chapter 12

Like Chapter 11, Chapter 12 imposes certain limits on the amount of debt you can owe, as well as what portion of that debt must be business-related. Additionally, to file Chapter 12, you must be a farmer or fisherman. Compared to other types of bankruptcy, Chapter 12 is relatively rare, but it can be a powerful way to improve your financial situation and business prospects.

Chapter 13

Sole proprietors are the only filers who can resolve their business debts through Chapter 13 bankruptcy. Chapter 13 is the simplest form of reorganization, in which you propose a repayment plan that uses all your disposable income for the next 3-5 years. If you complete the plan, the court can discharge any remaining unsecured debt. Because you are personally liable for business debts, Chapter 13 is a powerful option if you want to remain in business while reducing your financial obligations.

Let’s Create Your Plan Today

Determining which type of bankruptcy is best for you can be a challenge without experienced support. At The Buchalter Law Group, we have in-depth knowledge of all bankruptcy chapters and how they affect sole proprietors. Whether your goal is to eliminate as much debt as possible or rescue your business at all costs, we can develop the plan you need.

Call (321) 320-6088 or contact us online to schedule your free consultation today.

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