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Ask Bankruptcy Attorney in Sacramento, Stockton, Fairfield, CA – Should a Business Owner File for Chapter 13 or 7 Bankruptcy?

Before answering this question, a business owner must ask:  Do I want to keep my business or shut it down?

Business Owner wants to keep business:

If you want to keep your business assets and continue operations without interference from your creditors, it depends on the type of business entity and amount of assets you have.

If the business entity is other than a sole proprietorship like corporation, LLC, or partnership, you should consider Chapter 11 Bankruptcy reorganization.  Chapter 13 Bankruptcy is not available for those business entities.

If you are a sole proprietorship with business and personal assets that fall within the protection of the California exemptions, then Chapter 7 Bankruptcy might be an option for you if your debts are mainly unsecured dischargeable debts like credit cards and unsecured personal loans.  However, you might choose a Chapter 13 Bankruptcy over a Chapter 7 Bankruptcy if you owe a lot of recent IRS tax debt or other nondischargeable tax debt or your secured creditors are threatening repossession of business equipment vital for operation.

In contrast, if you are a sole proprietorship with a lot of business and personal assets that the California exemptions cannot protect, then you should NOT file for Chapter 7 Bankruptcy.  Chapter 7 Bankruptcy is "liquidation".  This means that the Chapter 7 Bankruptcy Trustee will liquidate business and personal assets that fall beyond the protection of the California exemptions.  Instead, the sole proprietor should file a Chapter 13 Bankruptcy if she can afford the monthly plan payment.  Chapter 13 Bankruptcy is a "reorganization".  It does NOT mean that you must repay 100% of your debt back.  How much you repay your creditors under a Chapter 13 Plan depends on your income, reasonable expenses, amount of nonexempt assets, priority debts, and secured debts.  A formula is involved in determining how much you have to repay your creditors.  Most of the time, people do a lot better in a Chapter 13 Bankruptcy than paying creditors on their own because they must continue paying those high interest rates.  Usually credit card rates are about 20% to 30% per year.  If you are having trouble keeping your head above water, it is almost impossible to get out of debt within 5 years when you are paying the principal plus the onerous interest rates.  At least your Chapter 13 Bankruptcy Plan payments will be over in 5 years or less along with your credit card debts, personal loans, payday loans, medical bills and tax debts.  Your financial troubles can end a lot quicker with a Chapter 13 Bankruptcy.

Business Owner who wants to shut down business:

If you are a business entity other than sole proprietorship, you can file for Chapter 7 bankruptcy on behalf of your business.  The business entity does not receive a discharge and cannot use exemptions to protect business assets.  The purpose of the Chapter 7 Bankruptcy here is just to sell assets and pay creditors.  You would choose this option if you do not want to liquidate the business assets yourself to repay your creditors.  This is bankruptcy for the business entity and does nothing to eliminate your personal debts or any promise or guaranteed that you personally made on the business debt.  You will have to file another bankruptcy for yourself.

If you are a sole proprietorship, you can file for Chapter 7 Bankruptcy assuming that you do not have any nonexempt personal assets or business assets that you want to keep.  Otherwise, as discussed above, the Chapter 7 Bankruptcy Trustee will liquidate those nonexempt assets to pay your creditors.  Unlike filing Chapter 7 Bankruptcy for business entity, you can use the exemptions to protect your assets and receive a discharge for your business and personal debts.  You only have to file one bankruptcy here assuming that you qualify for Chapter 7 Bankruptcy.

Keep in mind that information in this website is only for information only and cannot take the place of an experienced bankruptcy attorney.  Not every case is the same and must be analyzed individually to determine the best course of action.  There are other factors to consider that cannot be fully discussed here.  It could be that bankruptcy is not a good option for you, I would be the first person to tell you this in a detailed consultation.  To schedule a bankruptcy consultation, call Muoi Chea experienced Sacramento CA Bankruptcy Attorney.