How Chapter 13 Bankruptcy Affects Business Owners

  1. Personal Bankruptcy
  2. How Chapter 13 Bankruptcy Affects Business Owners

Are you a small business owner filing for Chapter 13 bankruptcy? Are you confused about how it will affect you and how you should prepare?

Do Bankruptcy Filers Who Own a Business Have to Close Their Business?

Business owners filing a Chapter 7 personal bankruptcy may need to shut down their business. Still, if the company is an LLC or corporation with additional owners, you may not need to close down shop even if you are personally liable for a large portion of the company’s debt.

Sole Proprietorship:

If you are the owner of a sole proprietorship, the bankruptcy trustee may require that you close the business when filing a personal Chapter 7 bankruptcy. They may need time to assess the value of the company, determine a likely sale price of any business assets in the bankruptcy estate, etc. This type of assessment generally takes at least two months. Requiring that you close the business also prevents you from incurring any additional liabilities during the bankruptcy case (regular business debts, potential legal claims against your business, etc.) Companies that operate with little to no assets like consultants, service providers, freelancers, etc. may be allowed to remain open during bankruptcy, especially if the risk of running up debt or liability is minimal. Although, even a small service business may be shut down by the trustee if they feel there are significant accounts receivable with the potential for collection. For example, a small real estate business with commissions that have not yet paid out will likely become part of the bankruptcy estate as will other proceeds the company generates while bankruptcy is in process.

Partnerships and Multimember LLCs:

If you are an owner in a business partnership or a multimember LLC, your share of the business will be part of your bankruptcy estate. However, unless you are a majority owner, most states prohibit the bankruptcy trustee from interfering with the business or taking any business assets. The possibility exists that the trustee could obtain a “charging order” against your interest in the company. The charging order acts as a lien against business interest that allows the trustee to receive any profit distributions you would generally receive as the owner of the interest. If the business does not regularly distribute profits to owners/members, it doesn’t do the trustee much good. The bankruptcy trustee could assign or sell the economic rights in your ownership interest to someone else, but they typically can’t transfer or sell your share of the partnership or LLC.

If you are a partner or member of an LLC, you might have signed a buy-sell agreement that requires termination of your ownership interest before filing bankruptcy. If this provision is in place and you violate it, you could risk facing a lawsuit from the co-owners. To assess the risks associated with this particular situation, consult an experienced small business attorney.

Corporations and Single-Member LLCs:

If you are the sole or majority owner of a corporation or LLC, your bankruptcy trustee can take over your shares or membership interest. The trustee can then vote to sell or liquidate the business and distribute the proceeds to the business’s creditors. Trustees generally take a cost/benefit approach when deciding to dissolve and liquidate. If the company has a moderate amount of debt and several valuable, nonexempt assets, the bankruptcy trustee is likely to dissolve the corporation or LLC to sell the assets.

Your personal bankruptcy may or may not affect your business if you own a viable corporation with other members. A business owner sharing equal ownership with other shareholders may file personal bankruptcy without bringing consequences down on the corporation, but it depends on the details.

The trustee has the right to vote shares in the corporation but won’t generally be able to force a dissolution unless the owner filing bankruptcy is the majority shareholder. The stock of the owner filing will still be part of the bankruptcy estate, but it doesn’t typically carry much value to the trustee unless one of the co-owners indicates they want to buy it.

If you own a business and you need information about how filing personal bankruptcy could affect your business, please don’t hesitate to get in touch with our experienced bankruptcy attorneys to discuss your options. Most bankruptcy offices in the Chattanooga area don’t have a single Consumer Bankruptcy Specialist on staff. Our office is the only one in Chattanooga with two. You are in good hands with Kenneth C. Rannick P.C.

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