Avoiding Bankruptcy as a Small Business Owner

The COVID-19 pandemic has hit small business extremely hard over the last couple of months as they struggle to stay afloat during stay at home orders and mask mandates. According to CNBC (https://www.cnbc.com/2020/05/19/how-to-navigate-bankruptcy-if-the-coronavirus-wrecks-your-business.html), the number of businesses that filed Chapter 11 bankruptcy in May was 26% higher than it was in 2019. More than 50% of small businesses expect that more than six months will pass before their business returns to its previous operation levels. To quote the thousands of advertisements that have rolled out during the pandemic, these are truly unprecedented times and small business owners will need to take precautions in order to avoid personal bankruptcy. These precautions will depend on whether or not your business is a sole proprietorship or a partnership.

Sole Proprietorship 

If you are a sole proprietor, your business assets will become entangled with your personal assets when filing for bankruptcy. This means that you should try and avoid a Chapter 7 bankruptcy at all costs. While Chapter 7 bankruptcy is the easiest way to clear all unsecured debts, your business assets will likely become property of the bankruptcy estate and will be liquidated to pay off creditors. This means that if you have to file for personal bankruptcy, you should look at Chapter 13. This will allow you to maintain ownership of both your business and personal assets, as long as you agree to a repayment plan that requires monthly payment over the course of three to five years.

Partnerships or Corporations

If your business is part of a partnership or corporation, then it is separate from your personal finances. While your personal finances will likely be unaffected, none of your business assets will be safe during bankruptcy proceedings. In these cases, you can choose to file either a Chapter 7 or 11 bankruptcy claim. In these cases, it is probably easier to file Chapter 7. Although you would ultimately need to close your business, you would be able to skip the process of selling off bits and pieces of equipment or assets in order to appease the bankruptcy estate. It will also grant you full transparency and prevent creditors from claiming any fraud.

Since Chapter 11 bankruptcies are created specifically for partnerships and corporations, it will allow you to continue operating the business. Like a Chapter 13 bankruptcy, it will require a monthly repayment plan. This option is ideal for businesses that are still bringing in enough profit to pay off the majority of their debts each month.

Small business owners should try to avoid entangling their business and personal assets in case of a potential bankruptcy filing. To get advice on seperating your company from your personal finances, reach out to a bankruptcy lawyer in Memphis, TN, like from Darrell Castle & Associates, before it’s too late.