If you are not generating enough revenue to repay the creditors, consider filing Chapter 7 bankruptcy as an independent business owner. Let’s talk more about it and answer common questions you may have about the process.
Types of Bankruptcy
Business owners usually file either of the two bankruptcies: Restructuring (Chapter 11) and liquidation (Chapter 7). But if you are a sole proprietor, you are personally responsible for your business debts.
If your business is overwhelmed with debts and restructuring seems impossible, then it’s usually best to file Chapter 7 bankruptcy. Doing so will help you to get rid of all qualifying business and personal debt too. Thereby, it can help you to stay away from stress and anxiety relating to your biz.
But as Chapter 7 is a liquidation bankruptcy, you will have to sacrifice your properties, savings, and other investments to repay your debts. However, filing Chapter 7 bankruptcy won’t affect your protected assets like your home, and retirement accounts.
What are the Eligibility Requirements for Filing Chapter 7 Bankruptcy?
To be eligible for filing Chapter 7 bankruptcy, you need to pass the “means test.” This test is designed to prove that your income is insufficient to repay debts.
However, in the case of filing business bankruptcy, if the business debt amount exceeds the amount of your personal debt, you will automatically qualify for filing Chapter 7 bankruptcy. That is, without needing to pass any “means test.”
What happens after Filing Chapter 7 Bankruptcy?
Once you file Chapter 7 bankruptcy, what happens next? It will include your business and personal debts as well.
The bankruptcy court will appoint a trustee who will analyze your debts along with your assets. Based on that, the trustee will look after the liquidation of your non-exempt assets.
The proceeds will then distribute among your creditors. In turn, that likely discharges you of the existing debts.
What is the Procedure of Chapter 7 Bankruptcy?
You will have to file the bankruptcy petition and submit a certificate stating that you have completed the credit counseling program. After that, expect to have to provide all your business and personal financial details to the court-appointed bankruptcy trustee.
Here are some of the documents you may have to submit, depending on the details of your situation:
- Tax returns from the last two years
- Current investment and retirement statements
- Credit card, collection, and other billing statements
- Six months of bank statements
- List of properties, along with their current values
The trustee will then go through the provided documents. This person may ask questions about your bankruptcy petition to the get the details they need to move forward. Furthermore, the trustee may allow the creditors to ask you questions.
If everything goes well, the trustee will then conclude the hearing. After that, you will have to attend a debtor education seminar and submit proof of completing it to the court. This proof is needed to receive your debt discharge.
Can You Keep Your Business Running after Filing Chapter 7 Bankruptcy?
Yes, you might be able to still run your biz. It depends on the type of business you own and the bankruptcy exemptions in your state.
However, if the trustee sells off the company or any property that is required for running the business, you are likely to lose it. But, there are a few exceptions.
Here are some exceptions:
- If you own a service-oriented business and you yourself provide that service like an accountant, gardener, etc., you won’t lose your business. Because tools required for your profession is one of the exempt assets that cannot be sold to repay your creditors in Chapter 7 bankruptcy.
- Some states like New York, New Jersey, Connecticut, Pennsylvania provide wildcard exemption. It can help you to protect any item that is not included in the list of exempt assets. But the wildcard exemption has a capping amount based on your state of residence.
How Much will It take to Receive a Debt Discharge?
Filing Chapter 7 bankruptcy can help you to get rid of your debts faster. So, you can expect to receive a debt discharge approximately after 3-5 months of filing your bankruptcy.
The bottom line is, filing Chapter 7 bankruptcy is a good way for independent business owners to start fresh by repaying their creditors. But at the same time, remember that bankruptcy is often considered as the last resort to eliminate debt. Moreover, filing for bankruptcy is quite a complicated process too.
So, it is advisable to consult with an experienced bankruptcy attorney to guide you through the entire process and provide recommendations. Also, maintain motivation during the bankruptcy process. To help you do so, read these 13 inspirational business quotes to keep your morale high.
However, if you do feel overwhelmed with your personal debt burden, consider other ways to eliminate debt before filing bankruptcy. For example, consider a debt consolidation plan through a genuine debt relief company.
These experts can help you to get rid of debts by negotiating with creditors on your behalf. Doing so can reduce the high-interest rates and set up an affordable repayment plan.
About Today’s Writer
Bethaine Parker is a content writer and blogger, specializing in personal finance. Curiosity for learning new things is a passion and this curiosity along with experience has made her a financial adviser. She is associated with debtconsolidationus.org where she shares her knowledge through her writings. You can find her on Twitter.