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Can You File Personal Bankruptcy While Owning A Business?

Owning a company can be stressful, especially if your personal finances are in jeopardy. Bankruptcy seems to be the logical way out for financial woes, but you must wonder how this will affect your establishment. The structure of the company will dictate if any of the company assets can be used to pay back your creditors.

You have a few options when it comes to bankruptcy, but it's best to speak with an attorney to properly advise you on the best route. As an individual, you can file either a Chapter 7 or Chapter 13.

Chapter 7 While Owning a Business on Long Island

Chapter 7 is known as a complete liquidation that allows you to have a fresh start. Many people choose this option because they don't have to pay back any debts. You are permitted a specific amount of exemptions or things that the court can't touch. This allows you to keep some assets after your discharge. The particular exemption amounts vary by state, though there are some classified under the federal code too. Any property that doesn't fall under an exemption must be surrendered to the court.

The Role of The Trustee

The trustee is an appointed individual that manages your case. They will take your assets and sell them to pay back your creditors. Don't try to hide anything from them as they are very diligent about checking your assets and making sure that everything has been properly claimed. Any omissions, whether by accident or on purpose, may result in your discharge being denied. It can also lead to charges of fraud. The trustee is a neutral party that helps to facilitate things for the court.

The trustee needs to make sure that selling the asset is going to be worthwhile and bring money to the creditors. If the value is insignificant, then they can choose to abandon it, and the asset goes back to the debtor.

Bankruptcy and The Legal Structure of Your Company

The legal status of your establishment means everything when it comes to your bankruptcy case. When you structured the company, you either listed it as a sole proprietorship, corporation, or limited liability company. The classification dictates what the trustee can sell. In some cases, they can sell the entire company along with any assets or stocks.

Sole Proprietorship

Many companies operate under a sole proprietorship. For instance, if you install carpeting on the side, then you probably file the earnings with your yearly taxes. You own all the equipment and inventory. So when you submit a chapter 7 bankruptcy, the court sees those assets as yours and not that of a separate entity. There is no jurisdiction between the company's assets and your personal ones.

Corporation

When the company is incorporated, things are a bit different, as it stands as a separate entity. The inventory, equipment, cash on hand, and accounts receivable are not your personal belongings. You own shares of the business. The trustee can only sell the shares that you own and not the stocks held by others. If there are no other shareholders, then they can sell the entire company.

Partnerships

When it comes to partnership, things are a bit more complicated. Each partner has a personal liability to the establishment. Any debts that the business has can also be included in the bankruptcy. It's essential to check the clauses in the partnership agreement as most have the verbiage that dissolves the partnership should someone file for bankruptcy. These cases often end in litigation as the partner in financial trouble is often seen as a risk to the business.

Regrettably, most people are disappointed that no exemption covers the stocks or assets of a corporation. There is a limited clause in some states that will cover personal assets used by an individual to do their job. For instance, the court won't take away a mechanic's tools because they wouldn't be able to work. Many states have a wildcard exemption that can be used to protect any asset, though the dollar value is typically low.

Chapter 13 Bankruptcy While Owning a Business on Long Island

In a Chapter 13, the process is quite different. A lawyer will draft a repayment plan based on disposable income. Disposable income is the income that is not needed to pay for bills or other necessities. Many people who own a company opt for this chapter as it allows them to continue to operate as usual. You would be required to pay back a fraction of your debts, depending on the amount of disposable income.

As the owner, you can choose a Chapter 7 or 13, but you need to talk to an attorney first. An experienced lawyer knows the ins and outs of the process and can help you make a wise decision. The valuable information given to you by an attorney is essential to make sure you don't lose your assets as the owner of a company. For more information, contact The Office of Adam C. Gomerman today.

As always, our team is here to help and guide you through the oftentimes confusing bankruptcy laws of New York State.
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