While owning a small business can be lucrative, it can also be financially burdensome for both the business and the owner. There are many small business owners who depend on their personal credit cards, personal guarantees, and even personal loans from banks to finance their Indiana business. When their debt becomes too burdensome, personal bankruptcy may loom on the horizon. However, the question becomes: what would become of a small business after its owner declares personal bankruptcy? The answer is influenced by several factors, including the business structure and the type of bankruptcy filed. 

Business structure matters

One factor that affects how filing for bankruptcy impacts a business is the form and organization of the business. While sole proprietors receive different treatment in the courts compared to businesses that are organized as limited liability companies (LLCs), sole proprietors also differ from corporations.

Unlike LLCs and corporations, a sole proprietorship does not have a distinct existence. Therefore, a sole proprietorship’s debts and liabilities are considered the same as those of the individual who owns the business. As such, if the business owner files for Chapter 7 bankruptcy, all of the business’s assets will likely become part of the bankruptcy estate. However, depending on the state, some assets can be exempted from sale to cover the debt owed. 

Personal guarantees can create problems

In many cases, the lender would request that you sign a personal guarantee when obtaining a loan, lease, or line of credit. Whether or not the company is an LLC or corporation, by having the personal guarantee, you can become personally liable for loan repayments. 

Once your business becomes insolvent, the creditor may look to the owner personally, since the debt can no longer be serviced. In this case, filing for personal bankruptcy can resolve the problem.

Chapter 7 versus Chapter 13 bankruptcy

When an individual cannot afford their debts, they might choose Chapter 7 bankruptcy. The debtor can sell off certain assets to pay back their debts, yet they are still able to eliminate many unsecured debts in full. Chapter 7 provides an excellent financial fresh start for business owners who have been having a difficult time. 

The Chapter 13 bankruptcy process differs from that of Chapter 7 because the filer does not sell their assets; instead, they enter a repayment plan, which takes three to five years to complete. Chapter 13 allows individuals who own businesses to get caught up on their secured debts and remain in business. 

Chapter 13 Bankruptcy might be an option for small business owners who receive consistent income.

Talk to a Danville, IN, Bankruptcy Lawyer Today

Chris Arrington represents the interests of debtors who cannot afford to pay off their debts. Call our office today to schedule an appointment, and we can begin discussing your next moves right away.