A small business owner with unmanageable debts can benefit from bankruptcy and enjoy a fresh financial slate from which to start over. Most small business owners choose to file either Chapter 7 or Chapter 13 bankruptcy. While both are viable paths to debt relief, they achieve this goal in different ways. Below, learn how filing for bankruptcy can impact a small business.

Chapter 7

Chapter 7 bankruptcy eliminates most types of unsecured debt by selling off a business's existing assets. For corporations, limited liability companies, and partnerships, this typically means that the business must close, employees are let go, and a bankruptcy trustee oversees the liquidation of the company. For a sole proprietorship, the owner's personal and business incomes are treated as a single entity, so both kinds of debt can be eliminated in one filing.

If a sole proprietor doesn't have much overhead or inventory and mainly provides a service, they may be able to utilize exemptions to protect their assets and keep the business in operation. To qualify for Chapter 7, the business owner must show their income is low enough to justify a bankruptcy filing.

Chapter 13

Chapter 13 does not eliminate debt, but rather restructures all or a part of it into a long-term repayment plan, which is paid off monthly over the course of three to five years. Unlike Chapter 7, only individual small business owners can file for Chapter 13.

A sole proprietor can file Chapter 13 and have their personal and business debts restructured into a single repayment plan. Chapter 13 lets a business owner retain all their assets, so long as they can keep up with current monthly payments and the monthly payments that are part of the three-to-five-year plan. A sole proprietor who files for Chapter 13 and owns a large number of business assets might not have enough exemptions to retain all of their property. In this case, the trustee would likely liquidate some of the assets.

See which type of bankruptcy is best suited to your business by consulting an attorney. Harry B. Zornow has been serving clients throughout the Hamilton, OH, area for over 30 years. He offers comprehensive representation in Chapter 7 and Chapter 13 bankruptcy claims. Call (513) 737-9770 or visit his website to schedule a consultation.