If a small business in East Orange, New Jersey struggles with debt, its owners can file Chapter 7 bankruptcy to get relief. The proceedings differ between consumers and small business owners, but also between business types.
Chapter 7 bankruptcy for LLCs
Chapter 7 is a legal process that removes certain debts by selling nonexempt assets through a trustee. An LLC or corporation is considered a separate entity, and they commonly have many shareholders who own stakes in the company. If shareholders file personal bankruptcy, they list the amount of stake they have in the business, and not the company.
Unlike personal bankruptcy, a business cannot use personal exemptions to protect nonexempt assets, because debts don’t get discharged. As soon as the owner files bankruptcy, the business must cease operation, but the automatic stay becomes active.
The automatic stay is a code in the bankruptcy law prohibiting further collection action and temporarily protects the company’s assets. However, a creditor may still pursue a debt in certain circumstances, such as for suspected fraud or payroll tax debt.
Chapter 7 for sole proprietors
A sole proprietor means a business that has one owner without a formal structure, such as a service business. Since it isn’t a separate entity, they must file personal and business bankruptcy, which can be beneficial. When a sole proprietor files Chapter 7, they don’t have to pass a means test, which limits the income needed to file.
A sole proprietor can erase unsecured debts, such as past-due utilities, medical bills, and past-due lease debt. They may also choose state or federal exemptions, but not both, to keep non-exempt assets up to a certain amount. However, bankruptcy does not remove liens, so they must stay current on mortgages or vehicle payments.
Sometimes, Chapter 7 is a sensible option for owners without many assets who need to close. However, since it can impact credit, they need to consider it carefully.