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Bankruptcy and sole proprietors

Sole proprietorships, operated by over 25 million sole proprietors, are the most common type of small business in this country. Even though single proprietorships do not offer protection for your personal assets from debt or liability, these organizations can still take advantage of some bankruptcy protections.

Risks

Single proprietorships are often used to start a new career or engage in a hobby. Filing a Schedule C for taxes, however, means that the government does not distinguish between personal and business finances. Sole proprietorships also lack personal asset protection.

If a proprietor defaults on a personal loan, for example, creditors may be able to force the sale of machinery or equipment used in their business to recoup the loan. Or if the proprietor defaults on a loan used to purchase equipment or machinery, lenders may take money out of their personal savings account or sell their personal property, except for their home.

Chapter 7 option

A Chapter 7 bankruptcy is a liquidation bankruptcy that may be an option for certain small businesses. This filing provides for the sale of tangible property and the depletion of bank and retirement accounts to satisfy creditors. The court appoints a bankruptcy trustee to supervise the liquidation of nonprotected assets and distribute the proceeds to creditors who must accept partial payment for the discharge of debt.

Chapter 7 may allow personal trainers, in-home chefs, in-home childcare providers, accountants, and other service providers resolve existing debt and conduct business in a more streamlined manner. Chapter 7 also has the advantages of asset protection, especially spousal protection, which gives sole proprietors the opportunity to resolve their debts, get their business operating more efficiently and have a fresh start.

Even if business debts are greater than personal debts or the filer has a high income, Chapter 7 may be an option for these business owners. Chapter 7, however, may not be helpful for sole proprietorships with business assets like specialized equipment, real estate, or production materials.

Chapter 13 option

Sole proprietors may also consider their eligibility for a Chapter 13 bankruptcy. This is a non-liquidation bankruptcy that is available to individuals.

The Chapter 13 process lasts three to five years. Regular payments are required on an extended timeline.

Some debts may also be reduced. However, Chapter 7 may bring more apparent and long-term savings.

Sole proprietors should collect and organize all their information and review whether these filings are beneficial. An attorney can help them review their situation, provide them options, and help seek relief under federal and New Jersey laws.