While the main focus of my bankruptcy practice is consumer bankruptcy, I do run across folks that own their own business and need to file bankruptcy. The cost and complexity of business bankruptcy mostly depends on two main factors: 1) whether the business is incorporated or is a sole proprietorship; and 2) the assets and liabilities of the business.
Let’s discuss the first factor. If a business is formally incorporated, such as a California Corporation or a LLC, the the business is a separate entity. This means that the business itself is not the same as the person or persons that own the business. A corporation or LLC can file bankruptcy, but they can not receive a bankruptcy discharge. Therefore, most businesses file Chapter 7 to liquidate and wind-down operations, or Chapter 11 to reorganize.
Business bankruptcy for sole proprietors is different. Because the business and its owner are the same thing, a business owner may file for bankruptcy and receive a discharge of his or her business debts. Business bankruptcy also allows a business owner to get out of long-term leases that would otherwise result in civil liability for breach of contract.
Another way that sole proprietorships and Chapter 7 bankruptcy interact is if a business owner wants to keep operating during the bankruptcy. Some bankruptcy trustees do not like a business continuing to operate throughout the Chapter 7 process. This is because the liability of the business belongs to the Trustee during the pendency of the bankruptcy.
Some Bankruptcy Trustees will require a Chapter 7 debtor to stop operating his or her business. Others will require a liability insurance policy that names the Trustee as an insured. Others will require the debtor to file a motion with the court asking the court to abandon the business back to the debtor before the case is over. Because a sole proprietor will typically rely on his or her business income to survive, you can see that it is very important to plan a Chapter 7 bankruptcy carefully in this situation.
If you own a business and are considering filing bankruptcy, please call my office at (916) 333-2222 for more information about business bankruptcy.