- A sole proprietorship allows you to mingle your business and personal finances. The law does not allow you to separate the two because you are filing bankruptcy. All personal and business assets and liabilities will be treated as one. When you file for bankruptcy, you are required to list your personal assets as well as your business assets on the bankruptcy schedules.
Usually, when a debtor files for Chapter 7 bankruptcy he or she has few personal or business assets. Chapter 7 is also known as "liquidation." As a sole proprietor, you will be allowed to keep a certain amount of your assets. The remainder, personal and business, will be sold to pay your obligations. You may be able to save your business if you file for Chapter 13 instead. Chapter 13 allows you to create a plan to pay off your debts. Generally, the courts will allow you up to five years to pay off the creditors; however, you can continue operating your business.
Another strategy is to incorporate the sole proprietorship before you file for bankruptcy. This will legally separate your personal and business assets and debt. However, your stock will become a part of the "bankruptcy estate." Under the bankruptcy codes, you are not allowed to exempt business assets. You may be allowed to purchase back ownership of the stock at the fair market value. This will enable you to continue operating your business. - Under a partnership, there is no legal difference between your personal and business financial situation. Your personal assets and debts, as well as your partner's, are directly tied to the finances of the partnership. Conversely, the assets and obligations of the business are linked to your personal profile and to that of your partner. Chapter 7 allows you to exempt a certain amount of your personal assets according to the laws of the state where you file.
However, the assets of the partnership are not exempt. The bankruptcy trustee is required by law to seize the personal property that exceeds the personal exemption. The trustee will liquidate personal property which exceeds the exemption amount, as well as the partnership assets, to pay off your obligations.
If you qualify for Chapter 13, you will be able to enter into a plan to pay your debts. This allows the business to continue to operate. Again, you may be able to incorporate the partnership, but your portion of the stock will become a part of the bankruptcy estate. - Your corporation is not sheltered from your personal financial doings should you file for bankruptcy. Although you don't own the assets of the corporation, you do own stock in the company. The stock must be turned over to the estate. The trustee can liquidate the company's assets to pay your personal debts. Again, you may purchase back the stock at the fair market value. If you incorporate and you plan on filing for bankruptcy, you should take the time to determine the actual market value of the stock if you would like to continue operating your business.
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