What sole proprietors need to know about filing for bankruptcy

When you are a sole proprietor, it is often a good idea to keep your business and personal assets as separate as possible. For example, you may have different bank accounts for business funds and personal funds. You might even have a car that you drive only for business reasons and another that you reserve for personal use.

However, if you file for bankruptcy, your business and personal assets will likely receive the same treatment. In other words, if it is business debt that is driving you toward bankruptcy, your personal assets could be at risk in addition to the business assets. Conversely, if you are struggling with personal debt, both your business assets and your personal assets are at risk.

You can probably keep many, if not all assets

Many people who file for bankruptcy fear losing their assets. The good news is that quite a few people, sole proprietors included, end up losing nothing, thanks to bankruptcy exemptions. In a Chapter 7 bankruptcy, the court tends to wipe out unsecured debts such as medical and credit card bills. Student loans, child support payments and IRS tax obligations may remain.

In a Chapter 13 bankruptcy, which you may prefer to do if you have a high income or high-value business assets you do not want to liquidate, your debt picture undergoes reorganization. You may still owe credit card debt and medical debt, but the payments become much more manageable. After a certain number of years, usually three to five, the court discharges any leftover debt.

It can still be complicated

Your business could be at risk of folding during your bankruptcy, so for its sake and your sake, it is important to consult with an attorney so you know all of your options. For example, an attorney will be able to determine whether Chapter 7 or Chapter 13 best benefits you and the business.

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