Protecting yourself when your business has to shut down is important, since you may be personally liable for your business debts, even after you close your small business.
Protecting Yourself When Your Business Has to Shut Down
If you’re considering closing down your struggling business, you may be concerned about personal damage control: how do you end the business without being pulled down with it? If you are responsible for the debts of your former business, your creditors may sue you personally in an attempt to collect on those debts.
Often, business owners are confused as to whether they are personally responsible for business debts since those debts often do not appear on their personal credit report. But debt does not need to appear on a credit report for you to be personally responsible for it. Protecting yourself when your business has to shut down becomes a top priority when you are personally liable for the debts of your former business.
Sometimes a business owner, operating their business as a sole proprietorship, accumulates a lot of personally-guaranteed debt while trying to keep the business operating. Where the business owner has accumulated too much debt, they may need bankruptcy relief.
Let’s look at three options for bankruptcy relief in a situation like this: 1) A no-asset Chapter 7 case, 2) An asset Chapter 7 case, and 3) A Chapter 13 case.
No-Asset Chapter 7 for a Fast Fresh Start
After putting so much effort and hope into your business, once you accept the reality that you have to give up on it, you may want to clean it up as fast as possible. And in fact, a regular Chapter 7 bankruptcy may be the most consistent with both your gut feelings and with your legal realities.
IF everything that you own—both from the business and personally—fits within the allowed asset exemptions, then your case may be fairly simple and quick. A no-asset Chapter 7 case is usually completed from filing date to closing date in about three months. If none of your assets are within the trustee’s reach, then there is nothing to liquidate and distribute among your creditors, a process that can take a long time.
But this assumes that all your debts can be handled appropriately in a Chapter 7 case—the debts that you want to discharge (write off) would be discharged and those that would not are the ones that are not dischargeable under bankruptcy law. Non-dischargeable debts often include certain taxes, support payments, and perhaps student loans.
Asset Chapter 7 Case As a Convenient Liquidation Procedure
If you do have some assets that are not exempt, that alone may not be a reason to avoid Chapter 7. Assuming that those are assets that you can do without—and maybe even are happy to be rid of, if they came from your former business—letting the bankruptcy trustee take and sell them may be a sensible and fair way of putting the past behind you.
That may especially be true if you have some debts that you would not mind the trustee paying out of the proceeds of selling your non-exempt assets. You can’t predict with certainty how a trustee will act, but this is something to keep in mind.
Chapter 13 to Deal with the Leftover Consequences
Even if you’d prefer putting your closed business behind you quickly, there may be fallout from that business that a Chapter 7 would not deal with adequately. For example, if the business left you with substantial tax debts that cannot be discharged, non-exempt assets that you need to protect, or a significant mortgage arrearage, Chapter 13 could provide you with a better way of dealing with these kinds of creditors. Deciding between Chapter 7 and 13 when different factors point in different directions is where you truly benefit from having a highly experienced bankruptcy attorney help you make that delicate judgment call.
Schedule a telephone call to discuss your situation with NJ bankruptcy attorney Jennifer N. Weil, Esq. at (201) 676-0722, schedule your own consultation on my Setmore page, or email weilattorney@gmail.com.
