If you are in the midst of filing for personal bankruptcy, it can easily feel overwhelming. You are struggling to pay back your own debts, and in turn, are unable to achieve financial freedom. But what happens when you are a small business owner? How does your personal bankruptcy filing affect your business’ finances? Here, the Maryland bankruptcy attorneys at Grossbart, Portney & Rosenberg, P.A. discuss the connections between personal and business bankruptcy filings, and how to ensure your business remains stable during this time.
Sole Proprietorships Connect Business and Personal Property
Chapter 7 bankruptcy, also known as liquidation bankruptcy is a form of personal bankruptcy in which you choose to liquidate your nonexempt assets in order to pay off your debts. While this is one of the faster forms of bankruptcy as you are using non-exempt assets as repayment instead of creating a payment plan, there can be additional repercussions on your business if you are a sole proprietor. A sole proprietorship is an unincorporated business, owned and run by one individual with no distinction between the business and you, the owner. That said, business assets are given additional exemptions. You are entitled to all profits and are responsible for all your business’s debts, losses, and liabilities. As it relates to bankruptcy, this means that any equipment or additional materials used for your business can be liquidated after filing for Chapter 7 bankruptcy. If you are unable to afford to liquidate your assets as a sole proprietor, consider filing for Chapter 13 bankruptcy instead, which establishes a payment plan and allows you to keep your assets intact.
Corporations and Limited Liability Companies May or May Not See Impact
Unlike a sole proprietorship, corporation, or limited liability companies (LLCs) are less likely to be affected if you file for personal bankruptcy. These companies are a separate entity from you, and in turn, the assets related to the business are not generally used to pay off your debts. An issue between business and personal debts arises if you are the sole or majority shareholder. Your appointed trustee will have the responsibility of deciding how your shares in the company are potentially liquidated and divided, and if these shares take up an extensive portion of your business’ finances, then you may not be able to financially recover. Personal service businesses generally have limited assets because the business is a mere conduit. If you have a number of shareholders, all of whom have an equal share in the business, it is unlikely that your business will be heavily affected. While your trustee will be able to vote for shares in place of you, it is not common to have these votes heavily sway the financial status of a business.
Partnerships Generally Require Debt Repayment from Personal and Business Assets
Finally, if you are involved in a partnership, it is more likely that your personal bankruptcy debts will affect your business. Similar to a sole proprietorship, partners are responsible for the debts of their business, which means that filing for personal bankruptcy may lead to those business assets being potentially liquidated as a form of repayment. When it comes to business loans for partnerships, both partners are solely responsible for the loan in its entirety. For example, if you have a loan of $400,000, you are both responsible for the full amount, not just 50%. In the same respect, if your partner files for bankruptcy, and there is not a proper clause in your contract outlining debt repayment, your partner is then responsible for the entire loan. Generally speaking, partnerships will likely dissolve during this time in an effort to maintain financial stability.
Contact Maryland Bankruptcy Attorneys at Grossbart, Portney & Rosenberg, P.A. for Help
At Grossbart, Portney & Rosenberg, P.A., we understand that the process of filing for bankruptcy is complex. Especially during this time of the novel coronavirus, bankruptcy filings are high, and individuals and businesses are fighting to stay afloat financially. When beginning the process of filing for bankruptcy, it is important to think through how this could affect your business, coworkers, and shareholders, and figure out which form of bankruptcy is right for you. To seek additional assistance in individual or small business bankruptcy filings in Maryland, contact our Baltimore office today.Here, the Maryland bankruptcy attorneys at Grossbart, Portney & Rosenberg, P.A. discuss the connections between personal and business bankruptcy filings, and how to ensure your business remains stable during this time.