Quit Setting Your Money On Fire

3 Things To Keep In Mind Before Filing Chapter 7 As A Sole Proprietor

by Kathryn Watson

For individuals and small businesses facing an unmanageable amount of debt that is impossible to pay off, filing Chapter 7 bankruptcy may be the most rational solution. When you file Chapter 7 bankruptcy, many of your debts are eliminated, giving you a bit of a financial clean slate and more breathing room to pay your bills each month. As a sole proprietor, you are self-employed and do not have a legally incorporated business. Filing Chapter 7 as a sole proprietor is a unique situation that requires additional planning. Here are three things to keep in mind about business bankruptcy:

Your Business Assets are Not Protected

In a Chapter 7 bankruptcy, you are entitled to keep a certain amount of personal assets which vary by state, but typically include your home, vehicle, and personal belongings. If you have assets beyond these exemptions, you may be required to have them liquidated to help pay off your debts.

What is tricky about a sole proprietorship is that since you never formed a legal business entity, such as an LLC, any business assets you have are included when determining the overall value of your assets.  For example, if your sole proprietorship is a business with computer, office, or crafting equipment, you will need to disclose these items and their values in your bankruptcy. It is important for this reason to go over the details of your business with your attorney before you file, to make sure you won't lose the items you need to run your business.

Your Business Debts Will Be Included

One benefit of filing Chapter 7 as a sole proprietor is that legally your business debts are placed in the same category as personal debts and can be included in your bankruptcy. For example, let's say you started a freelance accounting business and haven't incorporated it since you are the only employee. When you were starting out, you took out a business loan to get your business off the ground, but you got behind on your payments. This debt can be dissolved in your bankruptcy along with personal debts such as credit cards.

There is a Small Chance You Will Need to Cease Business Operations

In rare cases, a bankruptcy trustee will demand that a sole proprietor cease operating their business while the bankruptcy is in process. Discuss this possibility with your lawyer, and if they believe it may happen in your case consider if the financial hardship of ceasing business operations is too much to bear. One way to avoid this is to only include personal debts in your bankruptcy, and not including ant business-related debt.

If you are a sole proprietor considering Chapter 7 bankruptcy, the first step is to request a consultation appointment with an experienced bankruptcy attorney. They should understand the nuances and complexities of Chapter 7 for both your personal and business finances.