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Chapter 7 bankruptcy eliminates many types of unsecured debts. During the filing, you are allowed to exempt certain assets from liquidation so you will have sufficient resources to start over once the bankruptcy is finalized. In some cases, a small business can be an acceptable exemption, and in others, it will need to close before the bankruptcy can proceed. Below, learn more about the fate of your small business in a Chapter 7 filing.

Sole Proprietorship

A sole proprietorship is a small business owned and operated by a single individual. It is not a partnership or corporation. The finances of the business are the personal finances of the owner; there is no distinction between the two.

Because the owner and business are the same, the business can continue to exist after Chapter 7 bankruptcy. The bankruptcy trustee may recommend that you at least temporarily close the operation. This way, they can better determine the value, exemption status, and potential price of the business.

You also don't accrue any further debts during bankruptcy by closing the business temporarily. However, it may be a few months before you can reopen; you may need a different source of income depending on your situation. A sole proprietor with low overhead, like a consultant or freelancer, may not have to close at all.

Corporations & LLCs

Chapter 7 bankruptcyCorporations and limited liability companies are separate business entities from the business owner. Legally speaking, the company owns all the business's assets, and the owners own stocks or shares in the enterprise. In Chapter 7, the trustee might choose to sell your stocks or shares in the business to liquidate your debts.

Partnerships

In a partnership, you own a share of the small business with at least one other party. Like a sole proprietorship, the personal finances of the owners are the business finances of the company and vice versa. This could save you from having to close the business permanently. Bear in mind, however, that many partnership agreements stipulate that if one of the partners files for bankruptcy, the partnership dissolves, effectively closing the business.

 

To learn more about how your Chapter 7 bankruptcy filing will affect your small business, consult an attorney. Bender & Bender have been representing the Wood County, WI, region for more than 35 years. They offer representation in all aspects of Chapter 7 and Chapter 13 bankruptcy claims. Call (715) 423-4400 or visit their website to make an appointment.

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