Can I Go Bankrupt & Keep My Small Business?
Bankruptcy is a serious decision that you should only consider if you cannot make multiple debt payments and need to avoid multiple legal actions creditors have brought against you. If you own a small business and are considering filing for bankruptcy, the situation becomes more complicated but the same rules apply. Consider your financial position, what type of business you have and what you want from a bankruptcy. Hire a bankruptcy attorney to help make your decision.
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Connection to Business
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First, your connection to the business will influence in large part whether you get to keep your business. If you have a sole proprietorship or have an LLC with only a single employee (which is considered the same as a sole proprietorship for convenience of taxes), then you may be in trouble. The bankruptcy court will consider you and your business as the same entity. As a result, you can lose your business assets as easily as your personal assets, putting an end to your business.
Different Bankruptcy Effects
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The two primary types of personal bankruptcy are chapter 13 and chapter 7. In a chapter 13 bankruptcy, you can follow a financial plan set up by the bankruptcy estate that will allow you to make payments on some debts before they are fully canceled, while keeping most or all of your personal assets. In this situation you can usually salvage your business as long as you make the payments. A chapter 7 bankruptcy makes it much more difficult to keep your business if you own it alone. Partnerships and corporations can often continue operations if a partner or owner has a bankruptcy.
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Avoiding Business Loss
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If you want to make sure that you cannot lose your business, then you must make it into a corporation, partnership or other structure that will keep it protected from a personal bankruptcy. A personal bankruptcy can affect your holdings and possibly the investments you have personally made into the business, but not the business holdings themselves. Business owners should be careful, however. Incorporating before a bankruptcy is acceptable if the business transfers the debts as well as the holdings to the new corporation, but if the owners transfer only the assets, the bankruptcy court may regard the move as fraud and use the assets to pay the debts regardless.
Business Bankruptcy
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A business bankruptcy is different from a personal bankruptcy. If you file for a chapter 13 bankruptcy as a business, you can keep the business, although you need to pay debts from the proceeds of the business, which can be difficult for the court to estimate correctly. However, a business chapter 13 can be difficult to manage if your business is already failing, and may lead to a worse bankruptcy state that will liquefy all your business holding and close the business to pay off creditors.
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