Are you a small business owner considering filing bankruptcy? Our advice is to not hesitate – but not to rush in either.
Filing Bankruptcy: Chapter 7 or Chapter 13
No one wants to file bankruptcy or plans to file bankruptcy. However, in certains situations, bankruptcy can be a vital resource, and protection. Bankruptcy is essentially a legal process that allows individuals and businesses to wipe out debt or restructure debt (depending on which type of bankruptcy you file). Successful Chapter 7 bankruptcies result in a discharge of debt. Successful Chapter 13 bankruptcies involve a restructuring plan where (usually) part of the debt owed is repaid over 3-5 years.
Comparing Chapter 7 and Chapter 13 Bankruptcy for Small Business Owners:
Many individuals with a lot of debt are drawn to Chapter 7 bankruptcy since it wipes out all unsecured debt (credit cards, unsecured loans, etc.). If there’s a lot of debt, and not a lot of assets, Chapter 7 bankruptcy makes a lot of sense. However, for owners of small businesses, it’s important to note that Chapter 7 bankruptcy is often referred to as the “liquidation” bankruptcy because the bankruptcy trustee will close the business and liquidate the business’s assets to pay off debts whenever possible.
Personal Debts vs. Business Debts: Are You Personally Liable?
If your business is incorporated, you are not personally liable for the business’ debts. You could file either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy depending on the details of your situation. Chapter 7 bankruptcy is often a good choice for freelancers and sole proprietors who are underwater and whose business is not considered a separate entity (legally).
In Some Cases, You Could Lose Property When Filing Bankruptcy:
While bankruptcy is governed by federal law, your state bankruptcy exemptions determine how much property you are allowed to keep when filing bankruptcy. These amounts are called bankruptcy exemptions. One of the most common concerns when filing bankruptcy is whether or not petitioners will be able to keep their home. Tennessee’s homestead exemption allows you to exempt up to $5,000 of equity in your home. (This increases to $7,500 for joint owners and $25,000 if there is at least one dependent, minor child in the home). If you are 62 or above, you can exempt up to $12,500 of equity in your home ($20,000 if you are married, and $25,000 if your spouse is also 62 or above). Georgia’s homestead exemption is $21,500 (the amount is doubled if both the person filing and their spouse have an interest in the home). If the homestead exemption is not fully used, filers can use up to $10,000 of the unused portion to protect other personal property. This is known as the wildcard exemption. For small business owners, there are additional concerns regarding property loss since according to liquidation rules, most business assets fall outside of exemption rules.
If you are one of the many struggling small business owners looking for solutions, and you have questions about how bankruptcy could affect your business, please don’t hesitate to get in touch with Ken Rannick. Most bankruptcy offices in the Chattanooga area don’t have a single Consumer Bankruptcy Specialist on staff. Our office is the only one with two. You are in good hands with Kenneth C. Rannick P.C.