If I File for Bankruptcy, Will I Lose My Business?

Aged Come In We're OpenIf you are considering filing for a personal bankruptcy in New Jersey and you are a business owner, the biggest question on your mind has got to be, “Will I be able to keep my business?”

After all, your business is your livelihood and likely provides you with your income, so many business owners who incur personal financial troubles wonder how they will be able to provide for themselves and their families if their business goes under due to filing for a personal bankruptcy.

If you are filing for a Chapter 7 bankruptcy, whether or not you will lose your business largely depends on what type of business you own. If you are a sole proprietor, you may be forced to shut down your business (hopefully only temporarily). This needs to happen so that the bankruptcy trustee can fully evaluate the value of your business and if any of your business assets qualify for exemption. This process may take several months, but after that you may* be able to reopen your doors.

Those sole proprietors who have no assets, such as freelancers and consultants, most likely will be allowed to continue working because they have a low risk profile of incurring further debt.

If you are part owner of a partnership or LLC (Limited Liability Company), the trustee will most likely be prohibited from taking any assets from the business because it will affect the other members/partners. However, your percentage of the profits earned by the partnership or LLC will be taken into account in your bankruptcy, and the trustee will be able to take any of your profits in order to pay off your debts. Sometimes, partnerships or LLCs will require you to bow out of the company before filing for bankruptcy. If you signed an agreement to this effect, you could be sued by the other owners if you file for bankruptcy while still involved with the company. This is a very important detail that you must examine before beginning the bankruptcy process.

In order to avoid these difficulties, it is a good idea to set up your business as a corporation. This means your business will be considered a legal entity and you will have a share in the corporation. During a Chapter 7 bankruptcy proceeding, your share of the corporation will become property of your bankruptcy estate, however, you will be able to repurchase your share of the business after your bankruptcy is finalized.

Forming a corporation will allow you to file for bankruptcy without dragging your partners down, because they will also be shareholders in the business, and their shares will be unaffected by your personal bankruptcy.

Another option is to file for a Chapter 13 bankruptcy rather than Chapter 7. A Chapter 13 bankruptcy reorganizes your debts in such a way that they are much more manageable for you to repay. A Chapter 13 will allow you to retain possession of your business assets – which will in turn allow you to keep your business doors open without any worries. You will not be able to discharge your debts, but they will most likely be significantly reduced.

The bottom line regarding filing for personal bankruptcy when you also are a business owner is to work closely with a NJ bankruptcy attorney who has experience helping business owners get their finances back on track without losing their business in the process.

Image Credit: Czarina Alegre (Flickr)