When it comes to business, there are many things to think about. However, what if you hit a rough patch and can’t pay your bills? Can you file for bankruptcy and keep your business? The answer is yes. But there are some things you need to know first.

The Two Main Types of Bankruptcy Available to Consumers

There are two main types of bankruptcy, Chapter 7 and Chapter 13. Chapter 7 is known as liquidation and it is for businesses and individuals whose debts are so overwhelming that restructuring them using one of the other chapters is not feasible. All assets are sold off to pay down the debt that is owed to creditors. At the end of the liquidation process, all remaining debt is discharged.

Chapter 13 is typically only for individuals, but it can be used for sole proprietorships since that business status is indistinguishable from individuals. The goal for Chapter 13 is to reorganize debt and to repay it based on a repayment plan approved by the bankruptcy court.

Chapter 7

Sole Proprietorships

If you do file for Chapter 7, the court may insist that you close your business, at least temporarily. The trustee will need to assess the value and potential sale price of your assets, which can take a few months. This will also prevent you from incurring additional debt during this time and additional creditors from filing legal claims.If your business operates without assets, as with service providers, freelancers, or consultants, you may be allowed to keep your business open during the process, particularly if you don't have a huge risk of adding additional debt or other liabilities. However, if the trustee finds that there are significant accounts receivable (such as unpaid commissions) that could be collected, the trustee may require you to cease operations. Any money earned during the process does become a part of your bankruptcy.

Partnerships and Multi-member LLCs

If your business has more than one owner, and you are filing personal Chapter 7 bankruptcy, your part of the business becomes subject to the bankruptcy and the trustee could take any profits paid to you during the bankruptcy process to satisfy debts. Typically, however, the bankruptcy court will not interfere with the business operations or seize its assets. Economic rights to receive income can be sold, but your share of the partnership cannot be transferred or sold.You may be required by your partnership agreement to sell your interest in the business before entering bankruptcy, the money from which would then become part of your bankruptcy estate. If your agreement contains a buy/sell clause, you will need to adhere to that provision or you could face a lawsuit from your partners. Prior to filing for bankruptcy, you should consult an attorney to verify your obligations and assess your options with regard to your stake in the company.

Corporations
Single or majority owners of corporations face the bigger risk of losing their business under a Chapter 7 bankruptcy. The bankruptcy trustee is able to control your shares or membership and vote to liquidate the company's assets to pay off creditors. Whether the trustee does this or not depends on a cost/benefit analysis. The trustee will assess the value of the company's assets and decide how much they could be sold for, or if there are any exempt assets.
Corporations With Two or More Owners
In a case where you are one of multiple owners of a corporation, the situation will be handled much like a partnership or multi-member LLC. Unless you are a majority shareholder, the trustee will not be able to call a meeting to force the corporation to dissolve. The stock you have from the company will still be a part of your personal bankruptcy estate but has little value unless another shareholder wants to purchase it.

Chapter 13
Both business and personal debts can be included in a Chapter 13 bankruptcy, but only for sole proprietors. You are allowed to keep your assets during Chapter 13 since you are just restructuring your debt. This may be a good bankruptcy option if your business is still making money because you are likely to be allowed to keep your business running while paying a lower amount on non-priority unsecured debt such as personal loans, credit cards, and utility bills.The one issue that could arise with Chapter 13 could stem from keeping a high inventory of products or having expensive equipment on hand. This is because you'll have to file a bankruptcy exemption to protect your property from bankruptcy and most significant business assets cannot be exempted. This means they will be included in the payment plan and you'll have to fully repay any outstanding debts in three-to-five years. Expensive equipment or inventory will significantly increase your monthly payment.