Hundreds of thousands of Americans facing mounting debts choose bankruptcy each year as the best way to make a fresh financial start. Being unable to cover your payments, for whatever reason, and fearing that all your valuable assets may be lost is a prime reason to pause, take stock of your situation, and explore your options when it comes to dealing with spiraling debt.
Many people contemplating filing personal bankruptcy are also business owners. In such cases, there is the added concern of what to do with your business, especially in cases of sole proprietorships, to make the best use of the benefits offered by bankruptcy.
Sole Proprietorships and Bankruptcy: the Basics
Before considering when would be the best time to dissolve your company if you are planning to file for bankruptcy, it is important to understand some fundamental aspects concerning this type of business.
A sole proprietorship is a specific type of business organization that is owned by one person (or, in some cases, by a married couple). It is different from a corporation or a limited liability company (LLC) in a number of ways, the most important one being that there is no separation between a sole proprietorship and its owner from a legal point of view. As a sole owner, you can be held personally responsible for any of the debts and/or liabilities incurred by your business. In practice, this means that business creditors may sue you and take your personal assets (for example your home, car, or money in your personal checking account) to satisfy a judgment issued in their favor.
Because a sole proprietorship is not a separate entity from its owner, it cannot file its own bankruptcy, unlike corporations and LLCs. Consequently, if you wish to address business debts deriving from your sole proprietorship, you will need to file for personal bankruptcy, either under Chapter 7 or Chapter 13. Indeed, there is an extra advantage if the majority of your debt derives from your business, as you may be eligible to use Chapter 7 bankruptcy without having to pass the means test. In accordance with Bankruptcy Code §707(b) , the means test only applies to individuals whose debts are primarily consumer debts, as opposed to business debts. Therefore, if more than 50% of your debts are non-consumer debts, you should be automatically eligible for filing a Chapter 7 case.
To find out more about the options available in your particular case, as well as address any concerns you may have about your company if you are thinking of filing for bankruptcy, you should speak with a bankruptcy professional who can offer you solid advice. Our legal team at Roemerman Law is committed to helping people address financial problems in confidence, and we offer a free initial consultation.
To Dissolve or not to Dissolve?
Before deciding when would be the best time to dissolve your company if you plan to file for bankruptcy, it would be worth considering whether personal bankruptcy might actually help your business. Indeed, as many business owners move forward with filing for personal bankruptcy to address multiple spiraling debts, doing so may actually help you keep your business open, as dissolution is not always the only advisable option.
To this end, you will need to take a number of factors into account. While each individual case is unique, three main considerations are commonly taken into account.
Is Your Business Profitable?
The fundamental aim of any business is to generate profits. Hence, if your business is consistently losing money, dissolving it could be the right choice for you unless you can determine that this is something temporary. If this is the case, waiting before making this decision in order to see how things pan out might be a better way to handle matters, keeping in mind that you should resolve to be realistic about your situation.
Are Your Business Assets More Valuable Than Your Liabilities?
If your situation is one where your business assets are worth more than your liabilities, and your business is still making money, it would be wise to explore the possibility of saving it rather than dissolving it. In fact, in such cases, bankruptcy may prove to be very beneficial and could even help you keep your business afloat.
On the other hand, if this is not the case, you might be better off dissolving the company by liquidating its property toward paying off your debt, either outside of bankruptcy (i.e. before filing) or within the context of a Chapter 7 filing. Keep in mind that your case trustee may well end up doing this for you, so it’s best if you take the initiative and control the situation.
If you don’t have any valuable business assets and are also losing money, you should definitely consider filing for bankruptcy and closing down your business, preferably with the assistance of a seasoned bankruptcy attorney who will be familiar with the process.
Are You Personally Liable for Business Debts?
Since sole proprietorship owners are personally liable for business debts, you may be able to keep your business and negotiate its debts with your creditors. Closing down your business without doing so may prompt them to go after your personal assets to cover its liabilities if your business assets are not sufficient.
The other obvious choice is to file a Chapter 7 bankruptcy, which may enable you to discharge your personal guarantee against your qualifying business, as well as personal debts.
Dissolving Your Business
For sole proprietorship owners, both personal and business debts are treated the same way during bankruptcy, whether they file under Chapter 7 or Chapter 13. Given that there is no separation in such cases between private and business debt, it is not uncommon for sole proprietors to dissolve their businesses because of bankruptcy issues. No matter what may have led to your business failure, you won’t be able to simply walk away from your debt obligations, and your creditors may be able to hold you personally liable for your business debts and pursue you for them.
Quite often, the three main events that lead to the dissolution of sole proprietorships are the owner’s disability or death, the owner’s decision to do so for financial and all sorts of other reasons, and bankruptcy.
In the case of bankruptcy, the owner’s non-exempt and business assets will be listed and may be liquidated, depending on the particular circumstances of each case. Filing for personal bankruptcy may provide a way to dissolve your sole proprietorship and sell off its assets in a transparent and orderly manner. Remember that your creditors may start off an involuntary bankruptcy to protect their interests if your business is not doing well and you find yourself swimming in debt.
The Right Time to Dissolve Your Business
Determining the most efficient timing for dissolving your business if you are considering bankruptcy will depend on a multitude of factors. These include:
- the financial state of your company
- the total amount of debt you have and the percentage of it that relates to business, rather than consumer debt
- the existence and value of your assets
- the question of whether you qualify for Chapter 7 or Chapter 13 bankruptcy
In general, if you have a money-losing business and are in a position where you’re seeing multiple debts accumulating, dissolving your company after bankruptcy might be a better option—especially if yours is a service-oriented business and you don’t have any assets of considerable value.
In such cases, bankruptcy exemptions may actually help you protect relatively minor assets. Your Chapter 7 bankruptcy may end up in the liquidation of all your personal and business assets to cover your liabilities, having as an end goal to wipe out your dischargeable debts.
On the other hand, filing under Chapter 13 and dissolving your company in this context could be more complicated. As Chapter 13 bankruptcies involve a repayment plan overseen by a bankruptcy trustee, they require the existence of some available income that will go toward it. In such cases, if your company is not making money but you have some assets of value, it might be best to dissolve it and sell off your assets before proceeding with filing for bankruptcy, possibly securing a higher price for them than the one that will be secured by your trustee.
Contact Roemerman Law
At the end of the day, each situation is unique. There is no such thing as a one-size-fits-all solution and seeking advice from an experienced bankruptcy attorney may prove to be catalytic in the outcome of your case.
There is a saying about great lawyers and how they are really only selling two things—translation and peace of mind. Translation means they can take what you say and turn it into a proper legal argument before a court, while also explaining to you complicated notions in plain English. Peace of mind is knowing that you have someone you trust on your side, as your lawyer is on it.
Our team at Roemerman law promises to do precisely this—stay firmly on your side as someone who knows the process well, guide you through it, and help you take full advantage of your legal options. Book your appointment today to arrange an initial free consultation and find out how we can help you.