If you own a solo business and experience financial trouble, you may find yourself dealing with unmanageable business and personal debts. Filing for bankruptcy as a sole proprietorship can involve unique complexities that individuals may not encounter in a bankruptcy case. For the best chance of obtaining a fresh start, and to make the process more efficient and less stressful, familiarize yourself with the process of filing for bankruptcy as a sole proprietor.
Bankruptcy for Sole Proprietors
In a sole proprietorship, the business’s owner remains personally liable for the proprietorship’s debts, as the law does not recognize any distinction between a sole proprietorship and its owner. Thus, any business debts that a sole proprietorship has get added to the owner’s personal debts. When a sole proprietor files for bankruptcy, they can address both their personal and business debts.
Types of Bankruptcy Used by Sole Proprietors
Sole proprietors may have several options for filing for bankruptcy, depending on the amount of their debts, their income, and their assets. Bankruptcy options for sole proprietors include:
- Chapter 7 – Also known as a “liquidation” bankruptcy, Chapter 7 bankruptcy requires an individual to sell (“liquidate”) their non-exempt assets to generate funds to repay creditors. Because a debtor usually has debts remaining after liquidation, the bankruptcy court can grant a discharge of most types of debt, freeing the debtor from any continued obligation to repay those debts.
- Chapter 13 – Also known as a “wage earner’s” bankruptcy, Chapter 13 bankruptcy enables a debtor to create a repayment plan over three to five years using their disposable income. Chapter 13 can allow a sole proprietor to keep their business running while they pay down debts.
- Chapter 11 – In rare cases, a sole proprietor with a financially large business might qualify for Chapter 11 bankruptcy. Chapter 11 provides a form of reorganization bankruptcy for businesses, allowing enterprises to restructure their operations and debts to pay back creditors under a court-approved plan. Chapter 11 bankruptcies typically result in more complex and expensive cases than Chapter 13 bankruptcies. However, a sole proprietor with a large business may benefit from the Chapter 11 process.
Steps for Filing for Bankruptcy
The process of filing for bankruptcy as a sole proprietor can involve several steps:
- Evaluating the Financial Situation – A sole proprietor should review their financial situation to assess the suitability of filing for bankruptcy, including documenting their debts, assets, income, and monthly expenses.
- Consulting a Bankruptcy Attorney – Due to the financial complexities of owning a sole proprietorship, business owners should strongly consider consulting an attorney to file for bankruptcy.
- Completing Credit Counseling – Individuals who file for bankruptcy must first complete a credit counseling course.
- Filing the Bankruptcy Petition – This marks the beginning of the court process. A petition must include the debtor’s schedule of assets and liabilities, as well as documentation of income and expenses.
- Attending the Meeting of Creditors – A debtor must attend a meeting with their creditors to answer questions about their finances.
- Filing the Repayment Plan (for Chapter 11 or 13) – A debtor filing for Chapter 11 or 13 must submit a repayment plan for the court’s approval. In certain circumstances, creditors may have the right to submit a competing proposal.
- Liquidating Assets (for Chapter 7) – A Chapter 7 trustee will liquidate the debtor’s non-exempt assets and use the proceeds to pay creditors.
- Resolving Debts and Obtaining a Discharge – After paying back debts via liquidation or a Chapter 13 repayment plan, the court may discharge a debtor’s remaining eligible debts.
Talk to a Bankruptcy Lawyer Today
If your business and personal debts have become unmanageable, filing for bankruptcy can help you get out from under the weight of your debts and allow you to start on the path toward financial health. Contact The Cooney Law Offices today for an initial consultation with a bankruptcy attorney to learn more about the process of filing for bankruptcy as the sole proprietor of a business.
