As a bankruptcy attorney specializing in both personal and business bankruptcies, I have seen many small business owners struggle with financial difficulties. The economic impact of the COVID-19 pandemic and the potential recession looming over the U.S. has made the situation even worse, with many businesses shutting down permanently. In some cases, small business owners turn to personal bankruptcy as a solution to their financial problems. While personal bankruptcy can offer relief from overwhelming debt, it is essential to understand the potential impact on your business. In this blog, I will discuss how personal bankruptcy can affect your business and things to consider before filing bankruptcy so as to mitigate any potential risk to your business.
Personal Bankruptcy and Business Debt
Personal bankruptcy can impact your ability to obtain credit in the future. If you have outstanding business debts, filing for personal bankruptcy can affect your credit score, which is a vital factor when applying for business loans, lines of credit, or vendor credit. Of course, this doesn’t mean that you won’t be able to obtain credit – on the contrary – you will be able to rebuild your credit after a bankruptcy fairly quickly. However, qualifying for a business loan is more difficult, and as you rebuild your credit, you will be subject to potentially higher interest rates, and probably required to put up collateral. Therefore, it is important to consider how filing for personal bankruptcy may impact your ability to obtain business credit in the future and plan accordingly.
The Impact of Personal Bankruptcy on a Sole Proprietorship
Sole proprietorship is the most common business structure among small business owners. A sole proprietor is someone who owns an unincorporated business by himself or herself[1]. If you are a sole proprietor and file for personal bankruptcy, your business assets and liabilities are included in the bankruptcy filing because there is no legal distinction between you and “your business.” As such, your creditors can go after your business and/or personal assets to recover their debts. This can put your business at risk and, in some cases, lead to the termination of the business. Therefore, if you do in fact operate a sole proprietorship, it is important to consider how it may impact your business before filing bankruptcy and what you can do to protect the business.
One way to do so is to convert your sole proprietorship into a different business entity, such as a corporation or an LLC. These entities are separate legal entities from their owners, which means that their assets and liabilities are not included in personal bankruptcy filings. If you are considering filing for bankruptcy and are concerned about what may happen to the business or its assets, an experienced bankruptcy attorney can help you explore your options and ensure that you protect your business assets.
The Importance of Seeking Professional Guidance
Personal bankruptcy is a complex legal process that can have long-lasting consequences – especially when you own a business. Unfortunately, I’ve dealt with many cases whereby people filed for bankruptcy without the help of an attorney and ended up losing their business as a result. Therefore, and despite what others may think, it is crucial to seek professional guidance from an experienced bankruptcy attorney. They can help you navigate the process and make informed decisions about your finances and bankruptcy. Moreover, they can help you understand the impact of personal bankruptcy on your business and offer solutions to protect your assets and the business. It is important to work with an attorney who has experience working with small business owners and understands the unique challenges that they face. An attorney can help you explore alternatives to personal bankruptcy and ensure that you make the best decision for your business.
Alternatives to Personal Bankruptcy
I am very pro-bankruptcy because for the last twelve years, I’ve seen the positive impact bankruptcy has had on my client’s finances. However, bankruptcy may not be for everyone, and it isn’t the first option I present to clients. Especially those clients who have the means to pay off the debt faster than most. Accordingly, if you don’t necessarily need to file bankruptcy, but want to get rid of debt, there are other alternatives. One option is debt restructuring, which involves negotiating with creditors to lower your interest rates or payment terms. Another option is debt consolidation, which involves combining multiple debts into a single loan with a lower interest rate. In my view, bankruptcy is still better than either of these options, but if bankruptcy does not make sense for your particular case (you make too much more or have too many assets), a bankruptcy may do more harm than good. These alternative options, on the other hand, can help you reduce your debt and avoid personal bankruptcy when bankruptcy doesn’t make sense.
The following websites offer valuable resources for small business owners who are considering personal bankruptcy and its impact on their business. It is important to do your research and seek guidance from a trusted attorney to make informed decisions about your finances:
United States Courts - Bankruptcy Basics: https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics
Internal Revenue Service - Bankruptcy Tax Guide: https://www.irs.gov/businesses/small-businesses-self-employed/bankruptcy-tax-guide
Small Business Administration - Bankruptcy: A Guide for Small Businesses: https://www.sba.gov/business-guide/manage-your-business/handle-your-finances/bankruptcy
American Bankruptcy Institute - Small Business Reorganization: https://www.abi.org/small-business-reorganization/
U.S. Small Business Administration - Debt Relief Options: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/debt-relief
The National Association of Consumer Bankruptcy Attorneys: https://www.nacba.org/
Conclusion
Personal bankruptcy can have a significant impact on your business and obtaining business credit thereafter. Therefore, it is important to seek professional guidance and understand the potential consequences before filing for bankruptcy. If you are in debt, and need someone to explain how bankruptcy works and how the bankruptcy could impact your business, we are well qualified as a full-service law firm for people in this county and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, Union County, and Sussex County. Call us today at 973-554-9827 or toll free 973-696-8391.
[1] https://www.irs.gov/businesses/small-businesses-self-employed/sole-proprietorships
