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Posted by: Maricopa Lawyers on Apr 9, 2014

Small business owners can file for either Chapter 7 or Chapter 13 if your debts become insurmountable. There are benefits and drawbacks to both forms of bankruptcy depending on how much debt and assets you have and whether you intend to continue running the business.

Chapter 7 Bankruptcy

Both individuals and business entities can file for Chapter 7 bankruptcy. Small business owners can file Chapter 7 either on behalf of their business or for themselves personally if they are the sole proprietor. However, many business owners will do both because the business bankruptcy does not wipe out personal liability on business debts.

If you are a sole proprietor, Chapter 7 allows individuals to handle both personal and business debts by filing a single personal bankruptcy. Additionally, exemptions can be used to protect business assets meaning you can continue to operate the business after wiping out its debts in bankruptcy.

If your business is a partnership, corporation or LLC, Chapter 7 makes it easy to close shop and liquidate your business.

However, if you are not a sole proprietor filing a personal bankruptcy, your business will not receive a discharge of its debts in Chapter 7. Also, business owners can’t use exemptions to protect assets in a Chapter 7. Thus, all assets of the business are sold to repay creditors and business is shut down.

As a result it’s best to file Chapter 7 if you wish to close shop.

Chapter 13 Bankruptcy

Only individuals can file for Chapter 13 bankruptcy. Business entities such as partnerships, corporations and LLCs cannot file. However, sole proprietors can file for Chapter 13

In Chapter 13 individuals can keep their all of their assets and pay back debts through a repayment plan. If you have a lot of assets, a Chapter 7 trustee can sell them in if you don’t have enough exemptions. By filing a Chapter 13 individuals can protect business assets and keep the business running while debts are reorganized.

If your business is a partnership like an LLC you can wipe out your personal liability in a Chapter 13. Chapter 13 bankruptcy typically takes longer than a Chapter 7.