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Bankruptcy can be a stressful and overwhelming situation. Whether it’s a homeowner facing a possible foreclosure, an unemployed individual drowning in credit card debt, or a small business owner struggling with an inability to pay bills as they come due, discussing the situation with a bankruptcy lawyer can help to provide a clearer path of options. When it comes to small business owners, the discussion can be even more complicated.
Bankruptcy Considerations for Small Business Owners
Unfortunately for small business owners, bankruptcy is a two-fold discussion. First, the bankruptcy attorney and business owner need to discuss what can be done for the business. Second, a prudent bankruptcy lawyer will assess whether or not the operations of the business has affected the owner's personal finances. The trickle-down effect for a struggling small business is typically increased pressure on the owner’s personal finances. Owners often commit everything they have to saving their business, whether it be leveraging equity in their home, extending personal credit, drawing down retirement accounts or taking out 401(k) loans, the personal effect of trying to save one’s business can be severe. In the end, the owner might not be able to save the business, has accumulated excessive personal debt and has cashed out whatever nest egg of assets they previously had. The drawn out process of trying to save the business and it ultimately failing creates a number of potential bankruptcy situations:
Business Chapter 7 Bankruptcy:
The operations of the business cease. Creditors of the business are formally put on notice that it is no longer doing business and any assets that remain are liquidated by the appointed bankruptcy trustee and divided among the creditors in order of highest priority first (i.e. taxes). The business does not receive a discharge and the individual business owner may still be liable for some of the business debts, assuming there are insufficient assets of the business for the Chapter 7 bankruptcy trustee to pay creditors in full.
Personal Chapter 7 or Chapter 13 Bankruptcy:
The business owner attempts to eliminate and discharge as much carryover debt as possible. Whether the owner files Chapter 7 bankruptcy or Chapter 13 bankruptcy depends largely on the overall financial picture of the business owner's household and taking an inventory of any assets that remain. Assuming eligibility requirements are met, the owner receives a discharge of personal debts as well as personal guarantees of the business, but could nonetheless be stuck with some tax problems (See “Special Tax Situations in Bankruptcy”).
Chapter 11 Business Bankruptcy:
Operations of the business continue, at least temporarily. In this situation, either the profitability of the business has dramatically increased or the business has obtained an influx of cash (which could be from additional investors, obtaining a business loan, etc.), but not enough to immediately solve all the problems that accumulated when the business was struggling. Chapter 11 bankruptcy gives the business an opportunity to reorganize its finances, pay creditors and continue operating.
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