Running a small business brings many challenges. One of the toughest decisions you may face involves filing for bankruptcy. Chapter 7 bankruptcy is an option, but is it right for your business? Here’s how it could impact your small business.
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy offers a way to eliminate business debts after liquidating assets. People often refer to it as “liquidation bankruptcy” because it requires selling assets to pay creditors. However, many small businesses, particularly sole proprietorships, may lack significant assets to liquidate.
How does Chapter 7 bankruptcy affect small business owners?
Chapter 7 can help small business owners eliminate both personal and business debts. If your business is a sole proprietorship, business debts are tied to your personal assets, like your home. In this case, Chapter 7 offers a fresh start by discharging personal liabilities.
For LLCs or corporations, business debts may stay separate from personal debts. If so, Chapter 7 impacts only the business, liquidating assets to pay off creditors.
Is Chapter 7 right for my business?
Chapter 7 might suit your business if it is beyond repair, and you need to clear debt quickly. It helps could business owners that lack significant assets or income to support a Chapter 13 repayment plan.
However, if your business owns substantial assets, such as inventory or equipment, consider a personal Chapter 13 or a business Chapter 11. These options can allow you to restructure your debts and keep your business running.
What are the drawbacks of Chapter 7?
One major drawback of Chapter 7 is that it will likely force your business to close. If you want to keep your business open, Chapter 7 might not be the right choice. Also, if you’ve tied personal assets to business debts, you risk losing them.
Before filing for Chapter 7, carefully assess your business’s financial situation. While it offers a way out of overwhelming debt, it may not be the right choice based on your business structure and future goals.