Chapter 7 Bankruptcy: What Small Business Owners Should Know.
Many small business owners could benefit from Bankruptcy Protection. The benefits of filing for Chapter 7 Bankruptcy, but are unsure of what effect it will have on their small business. Certainly, the idea of a bankruptcy trustee closing down one’s business so that he or she can liquidate its assets to pay creditors makes filing for bankruptcy seem like a less attractive option. The effect that bankruptcy has on a debtor’s small business depends on what kind of business entity it is. This entry will focus on the two types of small business entities I see most often: the closely-held corporation and the sole proprietorship.
Chapter 7 Bankruptcy: Benefits of a Bankruptcy Attorney
Rosenberg Law Group, PLLC, offers a free half-hour consultation. We can help you review the issues surrounding your small business and bankruptcy. Chapter 7 Bankruptcy filings are complex enough to justify taking advantage of legal insight. With the right advice and planning, it is possible to rid yourself of personal debts while continuing to run your business and preserving your business’s assets.
Bankruptcy Law the Definition of Closely-Held Corporations
A closely-held corporation is a corporation in which the debtor is the sole or majority shareholder. When a debtor files for bankruptcy, the value of the debtor’s ownership interest in the corporation becomes part of his bankruptcy estate. Thus, if the debtor is the sole or majority owner of a corporation, the trustee can take over his shares or membership interest and vote to sell or liquidate the business, then distribute the proceeds to the business’s creditors (then to the debtor’s personal creditors once the business debtors are satisfied). The trustee cannot sell exempt property of the corporation, and it cannot sell property that belongs to the corporation unless the entire corporation is dissolved.
In deciding whether to dissolve a single-owner corporation, the trustee will apply a cost/benefit approach. The trustee will look at the cost of dissolving and liquidating the business, how much the assets can be sold for, and whether any of the assets are exempt. In many cases, the business owes almost as much as (or more than) it owns, so liquidating the business wouldn’t make financial sense. But if the business has a moderate amount of debt and valuable, nonexempt assets, the trustee is likely to dissolve the corporation and sell the assets.
Bankruptcy Law & Sole Proprietorships
A sole proprietorship is simply another name a debtor uses to do business. Since it is not a separate entity like a corporation, all the assets and debts of a small proprietorship are shared by the individual filing the bankruptcy. Consequently, all assets of the sole proprietorship will become part of the individual’s bankruptcy estate upon filing. The individual filing for bankruptcy can still use exemptions to cover property of the sole proprietorship to save it from liquidation, just as he or she could exempt their personal property that is not utilized for business purposes.
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