If you are a business owner considering filing for personal bankruptcy, you may be unsure if or how your business income and assets will be affected. This will depend on the type of ownership your business has established and the type of bankruptcy you file under. While the following is not inclusive of all you’ll need to know, it should give you a good indication of what to expect should you decide to file.
Are you the sole proprietor?
As a sole proprietor, your personal and business assets are seen as part of one entity. This means that if you file for Chapter 7 bankruptcy protection, your personal and business assets are equally at risk to be liquidated, which could threaten to shut down your business altogether. In order to keep your business assets, you must claim them as exempt. In New York, the assets you are able to exempt will depend on whether you chose the state’s exemptions or the federal exemptions. There is no mixing and matching of the state and federal exemptions. Whichever you chose, those are the exemptions available to you. Just as a few examples, under the New York exemptions, some of the property you can protect includes “tools” necessary to your business up to $3,000. The Wildcard exemption allows you to protect another $1,000 worth of property.
Just as sole proprietor’s business assets are viewed no differently than their personal assets, the same is true for income. All income earned through the business and otherwise must be reported to the bankruptcy court. The bankruptcy trustee generally requires bank statements and other means of supporting documentation.
If you file for Chapter 13 bankruptcy as a sole proprietor, you will be able to keep all of your assets, as debts are repaid through monthly payments. However, you will still need to consider exemptions. This is because the value of all non-exempt assets must be paid to unsecured creditors. You may not be able to fully exempt every asset you own, but even a partial exemption can significantly lower your payments.
Do you have a partnership?
A partnership is affected similarly to that of a sole proprietorship. All income and assets must be reported. However, in the case of a partnership, when a Chapter 7 bankruptcy is filed, no assets are exempt, which means the business will likely go under, unless your partner is able to replace the assets. With that in mind, if the business is expected to continue and you are able, it is recommended that you file for Chapter 13 bankruptcy.
If you file personal bankruptcy and are a shareholder in a corporation, the corporation’s earnings and assets will be unaffected as the corporation is considered a separate legal entity. On the other hand, if you personally guaranteed any debts for the corporation, those will need to be reported. By the same token, your shares in the corporation are considered personal assets and must also be reported. This means that your shares can be taken over by the bankruptcy trustee and potentially sold off to repay your personal debt.
Although the owner of a corporation doesn’t have to file the corporation or include its assets in a personal bankruptcy proceeding, the corporation’s assets are usually looked at by the trustee. This is especially true where they have large value and the corporation is in the process of closing. While the corporation’s assets first need to pay the corporation’s creditors, where there are items left over from a closing the assets are used by the trustee to pay personal debt.
Written by Ronald D. Weiss, an attorney who specializes in bankruptcy solutions, foreclosure solutions, and modification and negotiation solutions for individuals and businesses.