First Person: Small Businesses and Personal Bankruptcy

Contemplating filing for personal bankruptcy is a daunting task. There are many issues to be considered, including what it will do to your credit rating and what will happen to your assets. If you own a small business, the decision becomes even more critical as you need to be concerned about what happens to your business assets, your clients and your reputation.

When working with clients who face personal bankruptcy, the first question I always ask is about their goals. What are they looking for out of a bankruptcy filing? Wiping the slate clean? Getting some extra time to work out a payment arrangement with their creditors? These are questions that you need to ask yourself when you are considering bankruptcy.

As a small business owner, you must also consider what will happen to your business assets. Part of what will decide that for you is your business structure. If your business is a corporation, the shares of the corporation will form part of the bankruptcy assets but not the underlying assets of the company. There is often very little value placed on the shares of a small corporation as there is no market for them, so corporate small businesses are often left alone in a personal bankruptcy filing.

If your business is unincorporated, however, your business assets are considered your personal assets. They will be included when the trustee decides what should be distributed to creditors. If you have a service business, you may not have very many hard business assets, such as equipment and inventory. Your business can continue whether your assets are swept up in the bankruptcy proceeding or not. However, if your business relies on assets to function, bankruptcy will likely cause an interruption in your business operations and it may be difficult to start it back up again.

There are two main types of personal bankruptcy filings that you need to consider. A Chapter 7 (also called a liquidation bankruptcy) is usually filed by a debtor who has very few, if any, assets and no ongoing income. Small business owners almost never file for Chapter 7. Chapter 13 bankruptcy allows you to work with your creditors and set up repayment arrangements. You are not discharged from bankruptcy until all agreed-upon payments have been made. In a Chapter 13, you are allowed to keep most or all of your assets as they will be needed to generate the income to make the payments. This type of bankruptcy is the one that most small business owners file for so that they can continue to operate their business both during the bankruptcy proceeding and after discharge. There is minimal interruption in your day-to-day operations and most of your customers will not even know that you have filed. This is especially important if you are in a trust-based business.

It's not a foregone conclusion that you will lose your business if you file for bankruptcy. Work with an experienced bankruptcy lawyer and CPA before making any decisions and they will help you decide what works best for you.

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