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Can a small business owner file personal bankruptcy?

For many small business owners, their personal finances and the financial strength of the organization are one and the same. Unfortunately, numerous circumstances can lead them down a perilous path. From divorce and a down market to medical emergencies and a global pandemic, severe forces can negatively act on this combined financial stability. Fortunately, bankruptcy exists to help business owners seek a clean start.

While many business owners might fear that filing personal bankruptcy will force them to close their company, it is wise to understand there are pros and cons to the process. In general, personal bankruptcy falls into two options, Chapter 7 and Chapter 13.

  • Chapter 7, also known as debt elimination bankruptcy, allows a sole proprietor to clear both personal and business debt in a single process as that business entity ties both sets of finances together. Personal bankruptcy does not impact other business structures such as corporations, LLCs and partnerships as the finances are separate and clearly defined.
  • Chapter 13 is also known as debt reorganization. For those with income and assets that exceed the Means Test limits, Chapter 13 is a bankruptcy option. The Bankruptcy Code designed Chapter 13 so that individuals can reorganize and repay a portion of the overall debt while securing most assets. This allows the business owner to protect the company’s assets and keep the organization running.

As financial details are complex and unique to every situation, it is wise to discuss your options with a legal professional before making your final decision.

Tough times call for decisive action. A bankruptcy filing could actually pave the way toward financial health that a savvy business owner needs. The question for many people is whether Chapter 7 or Chapter 13 is the type filing to pursue. Don’t try to navigate the process alone. Seek guidance from an experienced bankruptcy attorney who can help maximize the benefits of bankruptcy protection.

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