Can I File Bankruptcy If I Own A Small Business?

Sunset Outside of Tucson, Arizona

Yes. For example, I had a prospective client come in recently, and he had a lot of credit card debt, about $75,000. But he also owned a small business that was just getting off the ground, a corporation, and he had a small rent house with some equity in it.

If he filed a Chapter 7 bankruptcy, otherwise known as “liquidation” bankruptcy, there is a liquidation Trustee appointed, whose job is to sell any “non-exempt” or extra property that the debtor has, and use the money to pay the debts as far as the money will go.

In this example, a Chapter 7 Trustee or liquidation Trustee may take the client’s stock in the business away from him, and either sell it or liquidate the business and use the equity to pay the creditors. And, a liquidation Trustee may try to sell the rent house, which the debtor did not want to sell because a relative was renting it from him.

But, if the client files a Chapter 13 bankruptcy, we could propose a plan to pay about $250 per month to a Chapter 13 Trustee for 5 years. The Chapter 13 Trustee then pays that money to the creditors, and when the plan is completed, the rest of the $75,000 debt is “discharged” or cancelled, and the client no longer owes it.

And the client can keep and continue to operate the small business, and keep the rent house. In Chapter 13, the debtor remains in possession of all property, unless the plan provides otherwise.

Also, the creditors cannot try to collect the $75,000 during the Chapter 13, because the client is protected by the “automatic stay,” a bankruptcy court order that goes into effect as soon as a bankruptcy case is filed.

Chapter 13 bankruptcy can be an excellent tool to help a consumer reorganize or rehabilitate their finances, while keeping their property and paying their creditors at a level that they can afford. It also stops the debt collectors from calling, and stops all other collection actions such as lawsuit and garnishments from creditors.