Personal Bankruptcy and Business Owners
It is quite common for those who have taken the plunge and opened their own business to end up in bankruptcy. In fact, if you think about it, without bankruptcy laws, how many entrepreneurs would be willing to make the leap and start their own business? If you could never escape the business debts incurred in starting up a business, the risk would simply be too great.
So the question then, if you own a business, and file for bankruptcy personally, what will the impact be to the business? Much depends on the chapter you personally file under.
Chapter 7 Bankruptcy
In a Chapter 7 case all of your assets become property of the “bankruptcy estate." The bankruptcy estate includes things like your home, your cars, your furniture, and pretty much everything you own. If you own a business, your ownership interest in that business becomes part of the bankruptcy estate. For instance, lets say you own a 50% interest in a Limited Liability Company (LLC) or you are 100% shareholder in a corporation. Your ownership interest in the company would become part of your bankruptcy, and would be an asset that the trustee in your case could look to liquidate. The trustee could look to auction off your interest in the company, or in the alternative you could pay the bankruptcy estate the value of your business to retain your ownership interest in the company.
Depending on the type of business you have, your ownership interest may have a lot of value or very little value. For instance, if you business is a service based business, it may have very little liquidation value. Essentially, you are your business and if you are taken out of the equation, there isn’t much value. On the other hand, your business may have inventory or equipment that has significant value whether you are there are not. It is this latter type of business that will more likely than not be the type the trustee will have an interset in.
Chapter 13 Bankruptcy
In a chapter 13 bankruptcy you will remain in possession of your assets. So, unlike the chapter 7 bankruptcy process described above, you will not have to worry about the trustee liquidating your interest in your business. This does not mean that the value of your business is irrelevant though. You will still have to value your interest in your business and this will influence the amount you are required to pay your creditors through your chapter 13 plan. My recommendation for most business owners is a chapter 13 so as to avoid the risks associated with a chapter 7 bankruptcy.