How Chapter 7 Bankruptcy Can Help Struggling Business Owners

Struggling business owners, especially sole proprietors, are often worried that their personal finances will go down with the company’s ship. But a Chapter 7 bankruptcy can help struggling business owners protect their personal assets and deal with dangerous levels of company debt. Understanding how the bankruptcy process applies to different types of businesses, can help you decide whether filing a bankruptcy petition is a smart business strategy.

Bankruptcy is Not Necessarily a Sign of Business Death

Business owners are often see filing for bankruptcy as an admission of defeat – that their company has failed and they can’t keep up with their debts. While a company cannot go forward as the same legal entity after a Chapter 7 bankruptcy, that does not mean that the business owner or the business as a whole, has failed. Sometimes, filing for bankruptcy can be strategic, allowing your company to move in a different direction without the baggage of earlier financial obligations.

There are many factors that can lead a small business to bankruptcy. According to the Bureau of Labor Statistics, approximately 18% of small businesses fail in their first year, and almost half do not survive their first five years. Small business owners increasingly turn to credit cards and private lenders offering capital at higher interest rates, and face the pressures of market factors like inflation and supply chain problems. When these stresses add up, it can push the business to the limits, and force struggling business owners to make difficult choices, including whether to file for bankruptcy.

Chapter 7 Bankruptcy Liquidates Business Assets

Before considering whether a Chapter 7 bankruptcy can help struggling businesses, it is important to understand what the process does and does not do. Bankruptcy is the legal procedure that struggling business owners can use when they are no longer able to pay their debts. Filing a Chapter 7 bankruptcy usually results in liquidation, distributing the business’s assets to creditors and discharging the company’s employees. Other forms of bankruptcy, specifically Chapter 11 and Chapter 13, provide options to reorganize the business or consolidate its debts. These options can keep the business going, in one way or another. However, they are only available for certain types of businesses, and have specific qualifying requirements. Choosing the right type of business bankruptcy depends on your business structure, ownership interests, debts, and financial health.

Sole Proprietorships Are Entitled to Discharge in Bankruptcy

One of the biggest benefits of a Chapter 7 bankruptcy for a struggling business owner is the discharge of personally guaranteed debts. Increasingly, small business owners and startup founders are required to sign personal guarantees for company debts. When the business falls behind on its debts, it can put the founders’ personal finances at risk.

Any business can legally file a Chapter 7 bankruptcy, but it is especially beneficial for companies with a single business owner. For sole proprietors, though, a Chapter 7 bankruptcy can discharge personal and business debts while protecting their most important personal assets. Once those debts are discharged, small business owners are under no obligation to repay creditors, even after they signed a personal guarantee. Corporations, LLCs and partnerships don’t receive the same kind of debt forgiveness. That makes a Chapter 7 bankruptcy an especially useful tool for the smallest small business owners.

Get Help Choosing the Right Bankruptcy for Struggling Business Owners

Struggling small business owners don’t have to fall under the weight of their companies’ debts. At Lawrence & Jurkiewicz, our business and bankruptcy attorneys are here to help individuals and small businesses find meaningful debt relief. We can help small business owners choose the bankruptcy option that is best for them, individually and for their business interests. We will meet with you to review your financial circumstances and guide you through the bankruptcy process. We want to help you make the right decisions for you and your business. Please call (860) 264-1551 or contact us for a consultation.