Filing Chapter 7 or Chapter 13 Personal Bankruptcy In Lieu of Chapter 11

August 22, 2010

Personal Bankruptcy Can Wind Up a Failing Business and Prevent Personal Liability in a Cost-Effective Way

Most people assume that the only debt relief option for any floundering business is a Chapter 11 bankruptcy. An economic downturn has taken its toll on businesses around the world, hitting smaller companies particularly hard. For owners of failed small businesses, particularly those so-called "mom and pop" companies, a viable option might be to file for personal bankruptcy protection under Chapter 7 or Chapter 13.

In fact, a personal bankruptcy is often:
- More efficient - resolving only one bankruptcy is quicker than filing for both personal and business bankruptcies
- Less expensive - there are only one set of court and attorney fees to be paid
- More comprehensive - it addresses all debts at once

Although a personal filing may not be a viable option for all business owners, it is potentially more beneficial than a Chapter 11 filing, so it is important for you to explore whether it is right for you.

Is This a Good Fit for You?

While careful business planning could allow you to stave off personal liability, if your company is in trouble, you could be at risk of owing thousands of dollars to cover business debts. This is almost universally true for businesses formed as sole proprietorships and partnerships. You will have to report your business and its assets (and your business' debts) during a bankruptcy filing.

You may even be able to discharge debt and still continue business operations. Some debt is not dischargeable, including payroll taxes that you may owe, but even discharging a small portion of your business and personal obligations can be extremely helpful, freeing up funds for other payments and freeing you from potential harassment or lawsuits.

If you are a sole proprietor, you and your business are seen as the same entity: if debts cannot be paid with business assets, creditors have a legal right to make claims against your personal net worth to satisfy liabilities. But, since you and the company are legally one and the same, filing for personal bankruptcy is an efficient way to address both professional and personal liabilities in one fell swoop.

A partnership essentially puts you at twice the risk - you are personally liable for the sum total of the business' debts, not just your half, but also any debts incurred by your partner if he or she does not have the assets necessary to contribute. Partnership funding may also be based upon a waiver of personal liability or pledging collateral, so filing for Chapter 11 business bankruptcy could still put your personal assets at risk.

What to do if You Decide to Give Up Your Business

If you are not planning to continue your business operations, it will be necessary to wind up a partnership, sole proprietorship, LLC, corporation or LLP before the bankruptcy. Even though these are business matters, an experienced personal bankruptcy attorney may be able to simultaneously handle these matters and a separate Chapter 7 or Chapter 13 filing. In fact, as mentioned above, having a personal bankruptcy attorney can be significantly cheaper, saving you attorney fees, and it can be quicker, keeping you from having to seek the counsel of two separate lawyers.

Article provided by The Arizona Law Group of Trezza & Associates LLC
Visit us at www.filebankruptcyinarizona.com