A business bankruptcy is different than a personal bankruptcy, and Chapter 7 may have different implications based on the structure of the business an individual operates when personal bankruptcy is being considered. If a company uses Chapter 7 to deal with unmanageable debt and financial difficulties, the business will close. However, a personal filing of Chapter 7 does not result in the termination of a business run as a sole proprietorship.
In deciding which form of bankruptcy to use for personal needs, an individual may need to evaluate whether there is a need to wipe out debts or whether there is an interest in repaying the amounts over time. In Chapter 7, an individual typically lacks the finances needed for repaying outstanding debts. However, eligibility is also important based on a means test.
A sole proprietorship is not a separate legal entity, and so a personal bankruptcy may be filed without affecting the operation of the business in some cases. In cases involving a limited liability corporation or partnership, which are separate and distinct entities, the business needs to file if it is facing the level of indebtedness that it is unable to repay. Chapter 7 allows a business to be liquidated, but this also terminates the existence of the company. Chapter 11 serves as an alternative if owners want to continue the business. In Chapter 11 bankruptcy, a company can continue to operate, allowing it to earn funds that can be used to pay outstanding debts. In some cases, others may be appointed to handle business operations.
If the path for dealing with business and personal financial challenge is unclear, it may be helpful to begin by consulting a bankruptcy lawyer. This may allow for alternatives to bankruptcy to be discussed. It may also provide clear direction for closing a business or for continuing its operation as personal finances are reorganized.
Source: Houston Chronicle, “Can I Keep My Business If I File for Chapter 7 Bankruptcy?”, August Jackson, accessed on Feb. 8, 2015