Can You File Bankruptcy If You Own a Small Business?

TL;DR

Yes. Self-employed people and small business owners can file bankruptcy. In many cases, they can eliminate debt, protect important assets, and sometimes even continue operating their business afterward. Every situation is different, but owning a business does not automatically prevent bankruptcy relief.

Small business owners should not assume that bankruptcy is not an option for them.

At the Law Office of Louis S. Haskell, we have helped many small business owners navigate bankruptcy while protecting of their livelihood.

The Biggest Misconception

A lot of business owners believe:

• “I own an LLC, so I can’t file.”

• “If I file bankruptcy, my business automatically closes.”

• “I’ll lose everything.”

In reality, bankruptcy law is often more flexible than people realize. Whether you can keep operating depends on several factors, including:

• The type of business you own

• Whether debts are personal or business-related

• The value of business assets

• Whether you personally guaranteed loans

• Whether you want to continue the business

Every case is different.

Why Business Owner Bankruptcies Are More Complicated

Bankruptcy for someone with a regular paycheck is usually more straightforward. Their income is predictable; expenses are stable, and financial records are easier to organize.

Self-employed individuals are different.

Income can fluctuate dramatically from month to month. Taxes are often filed later in the year. Profit-and-loss statements may need to be reconstructed. In some situations, determining what belongs to the business versus what belongs to the person becomes a major issue.

Business assets also create additional complications.

A house, retirement account, or vehicle is usually easy to value and protect under bankruptcy exemptions. Business equipment, tools, inventory, and commercial vehicles can be much harder to evaluate and protect.

Can You Keep the Business?

Sometimes yes.

However, there are situations where:

• The business closes, but the owner starts over cleanly

• The owner restructures debt through Chapter 13

• A new company is formed after liquidation of the old entity

• The owner negotiates to buy back certain business assets from the bankruptcy trustee

This is why strategy matters.

A properly structured bankruptcy can sometimes allow a business owner to move forward rather than permanently shutting everything down.

Chapter 7 vs. Chapter 13 for Business Owners

Chapter 7

Chapter 7 is often used when the debt situation is no longer recoverable. It may allow the person to wipe out qualifying debts and start fresh.

For some business owners, Chapter 7 means closing one entity and moving on from the financial mess. It may also mean using Chapter 7 to close one indebted company well opening a new company with a fresh start.

Chapter 13

Chapter 13 can sometimes work well for sole proprietors or self-employed individuals who still have income coming in. Under the right circumstances, Chapter 13 can be used to reorganize personally guaranteed corporate debt as well as the business debt of sole proprietors or even partnerships.

It may allow:

• Reorganization of debt

• Structured repayment plans

• Catching up on obligations over time

• Continuing operations while addressing financial problems

•  The cramming down of secured debt on business assets.

In many cases, Chapter 13 provides more flexibility than people expect.

Chapter 11

Timing Matters

One major issue for self-employed clients is documentation.

Many business owners:

• Have not yet filed current taxes

• Need updated bookkeeping

• Need profit-and-loss statements prepared

• Have incomplete financial records

The earlier someone gets advice, the more options they usually have. Waiting until lawsuits, levies, repossessions, or aggressive collections begin often limits flexibility.

The Reality

There is no “one-size-fits-all” bankruptcy strategy for business owners.

The right approach depends on:

• What you owe

• What assets exist

• Whether the business is viable

• Whether you want to continue operating

• Whether reorganization is realistic

But owning a business does not automatically prevent bankruptcy relief.

Chapter 11 is available for small businesses and Subchapter V was a great innovation. However, the object of the game is to avoid Chapter 11 wherever possible, simply because the cost of filing tends to become unbearable for too many distressed small businesses.

Key Takeaways

• Small business owners can qualify for bankruptcy relief.

• Chapter 7 and 13 can both work depending on the situation.

• Early planning and accurate financial records can make a major difference.

For more information or to schedule a consultation with Attorney Louis S. Haskell, contact the office directly at 978-459-8359