When is Business Bankruptcy Also Consumer Bankruptcy?


Small businesses and family-owned businesses can be great investments for many people in Oak Park. However, like individuals and other larger businesses, small businesses can struggle with debt. Small businesses and family-owned operations can have trouble making payments on business debts, and they can amass credit card debt that amounts to much more than the revenue that the business is bringing in. When a business is having a lot of financial trouble, many people assume that the business can file for Chapter 7 bankruptcy or Chapter 11 bankruptcy, and that the owner (or owners) can protect their personal property and personal financial history even though the business may have to close.
However, there are some situations in which a business bankruptcy is actually more like a consumer bankruptcy. More precisely, for businesses that are structured as sole proprietorships, business bankruptcy is actually consumer bankruptcy. We will say more about how this works, and why this business structure is different from the others when it comes to owner liability.
What is a Sole Proprietorship?
When someone decides to open a business, she or he needs to decide on a business structure. For an individual who plans to open a small business, a sole proprietorship often looks like the best option. As the U.S. Small Business Administration (SBA) explains, “a sole proprietorship is the simplest and most common structure chosen to start a business.”
The SBA’s definition of a sole proprietorship also explains why a business bankruptcy is not simply a business bankruptcy that keeps the owner’s personal finances out of the equation: “[A sole proprietorship] is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses, and liabilities.”
The SBA underscores that, while having total control of a business through a sole proprietorship can be one of the benefits of this type of business structure, it can also become one of the disadvantages. The fact that there is unlimited personal liability means that, if your business needs to file for bankruptcy, you will need to file for personal bankruptcy; “Because there is no legal separation between you and your business, you can be held personally liable for the debts and obligations of the business.”
How Personal Bankruptcy can Help When a Sole Proprietorship is Struggling With Debt
When your sole proprietorship is struggling with debt—whether you own a restaurant, a stationery shop, or a used clothing business—you are responsible personally for the debts of the business. This means that, when you fail to pay business debts and get behind on payments, debt collectors who are trying to recoup what the business owes can come after you personally.
In these situations, personal bankruptcy may be able to help. To be clear, a sole proprietorship cannot file for its own bankruptcy in the way that a corporation can. Instead, the business owner of the sole proprietorship will need to file for bankruptcy. If you want to file for Chapter 7 bankruptcy to discharge business debts and get a fresh start, you can do so without having to pass the means test. In such a case, however, you will need to close your business. If you want to keep the business open, you can file for Chapter 13 bankruptcy to reorganize the business’s debts and to keep its doors open.
Contact a Bankruptcy Lawyer in Oak Park
If you have questions about personal bankruptcy and sole proprietorships, an experienced consumer bankruptcy lawyer in Oak Park can help. Contact the Emerson Law Firm today for more information.
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