Everything About Sole Proprietor Bankruptcy

Understanding Sole Proprietor Bankruptcy


Understanding Sole Proprietor Bankruptcy secIndividuals starting small businesses or home-based ventures are automatically considered a sole proprietorship. Unlike a limited liability company (LLC), a sole proprietorship does not need to be registered in Georgia.

Despite the benefits of being a sole proprietor, some downsides become obvious as soon as you start struggling with debts. Sole proprietorships are not considered separate entities from their owners, so they can be held personally liable for business debts. Therefore, if you need to file bankruptcy, you must file as an individual.

Bankruptcy can be a good option when your business can no longer fulfill its financial responsibilities. However, the appropriate type of bankruptcy will depend on your situation and business structure.

Are you a business owner and considering filing for bankruptcy? It is crucial to seek counsel from an experienced bankruptcy attorney. At Cherney Law Firm, LLC, we help business owners navigate their financial struggles and find solutions.


What Is Sole Proprietor Bankruptcy?


Sole proprietor bankruptcy is a personal bankruptcy used by single-person businesses facing debt payment issues. It differs from business bankruptcy in the following ways:

  • Assets: Personal finances and assets in a sole proprietorship are not protected from creditors. However, when a corporation files for bankruptcy, personal assets are protected from business creditors.
  • Debts: An individual who is a sole proprietor is responsible for any business debts. On the other hand, a corporation is a separate legal entity responsible for its debts.
  • Bankruptcy type: A sole proprietor will typically file for Chapter 7 or Chapter 13 bankruptcy. A corporation cannot file for Chapter 13 and will typically file for Chapter 7 or Chapter 11 bankruptcy.


Types of Bankruptcy for Sole Proprietors


Types of Bankruptcy for Sole ProprietorsSole proprietors can generally file for Chapter 7 or Chapter 13 bankruptcy. There may also be some benefits to filing Chapter 11.


Chapter 7 Bankruptcy

Chapter 7 bankruptcy involves selling personal and business assets to pay off unsecured creditors. After all nonexempt assets are liquidated, typical business debts, such as vendor or supplier debts, are discharged.

Sole proprietors face several implications from Chapter 7 bankruptcy, including:

  • Loss of personal assets to pay off business debts
  • Remaining on the individual’s credit report for ten years
  • A risk of losing the business if it requires nonexempt property to operate

On the bright side, you will be exempt from the means test if your unsecured debt is mostly business debt. You will also be able to get a discharge of your debts quickly.


Chapter 13 Bankruptcy

Chapter 13 bankruptcy involves creating a repayment plan to pay off creditors within 3-5 years. If your sole proprietorship has a regular and adequate source of income, this could be a good option. You will work with creditors and the bankruptcy trustee to restructure your business debts.

Chapter 13 may be a suitable option for sole proprietors because:

  • Unlike Chapter 7, Chapter 13 bankruptcy allows business owners to keep their assets and instead use disposable income to pay creditors.
  • It allows individuals to continue operating their business ventures while repaying debts.
  • It remains on individual credit reports for seven years.


Chapter 11 Bankruptcy

Chapter 11 bankruptcy is a viable option if you wish to reorganize debts as you continue to operate your business. Chapter 11 also allows sole proprietors the opportunity to restructure their business and operations. However, Chapter 11 is more expensive than both Chapter 7 and Chapter 13 bankruptcy, and you will be exposed to the same risks regarding your personal assets.


Bankruptcy Exemptions


As a sole proprietor, your personal and business assets will be liquidated to pay off your debts in Chapter 7. However, you may be able to keep certain assets. Georgia bankruptcy exemption laws, OCGA § 44-13-100, allow debtors to exempt certain personal assets from liquidation up to certain limits. Some of the exemptions allowed in Georgia include:

  • Homestead exemption up to $21,500 in equity in your primary residence
  • Personal property exemption up to $5,000 in personal property, including household goods
  • Tools of trade exemption up to $1,500 in equipment necessary for the debtor to earn a living
  • Vehicle exemption up to $5,000 in equity
  • Wildcard exemption up to $1,200 in any property and up to $10,000 leftover from the homestead exemption
  • ERISA-qualified retirement accounts
  • IRAs and public benefits


Choosing Bankruptcy as a Sole Proprietor


Choosing Bankruptcy as a Sole ProprietorChoosing to file bankruptcy is a significant decision. It is essential to consider available options and consult with a bankruptcy lawyer.

Before filing bankruptcy, consider taking these steps:

  • Examine your financial situation: You need to assess your income, expenses, assets, and debts to understand your financial situation. This will help determine your ability to pay off debts through alternatives like debt consolidation.
  • Consider the type of bankruptcy: You should assess your goals and whether you wish to liquidate your assets or create a repayment plan. Your eligibility for the type of bankruptcy should also be a factor to consider.
  • Determine eligibility: Depending on the type of bankruptcy and if you have received a discharge in the past, you may or may not be eligible to file bankruptcy. An experienced bankruptcy attorney can help you determine your eligibility.
  • Gather financial documents: You should gather all documents related to your finances, including tax returns, bank statements, debts, and assets. 
  • Complete credit counseling: Credit counseling can help you determine if bankruptcy is a viable option and other strategies to manage debt. This is also a prerequisite to filing bankruptcy.
  • Consult a bankruptcy attorney: An experienced bankruptcy attorney can provide guidance on bankruptcy laws and explain the process. They will provide the needed guidance at every step.


Continuing Business Post-Bankruptcy


Operating a business after bankruptcy is possible. Bankruptcy can offer relief from financial obligations and unsecured debt, allowing you to continue operating your business by:

  • Reorganizing business debts and operations
  • Retaining critical assets necessary for business operation
  • Eliminating or reducing business debts

On the other hand, sole proprietorships can face several challenges after bankruptcy, including:

  • A negative stigma around a business
  • Reduced access to credit
  • Rebuilding trust with customers and suppliers

Your attorney will help you weigh the effects of bankruptcy on your business and help you make informed decisions.


Navigating Bankruptcy With Cherney Law Firm, LLC


Is bankruptcy right for your financial situation? An experienced bankruptcy lawyer can provide the needed guidance and advice. At Cherney Law Firm, LLC, we have helped thousands of clients regain financial stability through bankruptcy.

Attorney Matthew Cherney provides knowledgeable guidance on bankruptcy law to help his clients attain positive outcomes. Attorney Cherney will help you understand your options and find the appropriate solution.

Contact us today for your free consultation.

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