A question that often comes up is, “I’m self-employed and my business is losing. Should the business file bankruptcy or should I file as an individual or both?”
If you are a sole proprietor, you and the business are the same entity, in which case, if your income isn’t too high (i.e., you pass the Means Test), you may file under Chapter 7 individually, regardless of how much debt you have.
If your income is above Means Tests limits, whether you can file under Chapter 13 (so-called wage-earner’s plan) or Chapter 11 (business reorganization) will depend on how much secured and unsecured debt you have.
If you are under the debt limits ($360,475 in liquidated, noncontingent unsecured debts; $1,081,400 in liquid, noncontingent secured debts), you can file under Chapter 13. If you owe more than that, you may have to file under Chapter 11. (The definition of a “liquid, noncontingent” debt is beyond the scope of this blog, as is a discussion on ways to get around the limits).
The situation is a bit different if your business has been operating as a limited liability company or corporation. In this case, you and the business are separate legal entities, and the question is whether one or both should file. Unless you have personally guaranteed the company’s obligations, you could just decide to liquid the business, pay the creditors what you can from the proceeds and not file bankruptcy at all. Before you make this decision, you should consult with an attorney on how to do it properly, so you don’t do anything that could be construed as defrauding creditors.
If, on the other hand, you believe the business could eventually succeed if you just had a little “breathing room,” you could file a Chapter 11 reorganization plan to get the creditors off your back.
In any event, whether you should also file individually requires further analysis.
For example, when a lender requires a personally guaranty of a business loan, the loan agreement generally provides that insolvency of a guarantor is a default of the loan. If you are trying to keep the business afloat, this could do in the business.
As you can see, there are a lot of factors to consider when contemplating bankruptcy for yourself or your business. The best course is to seek professional advice to help you decide on the best course of action.