When you start your own business, you’re excited about the future possibilities. Ideally, it will be a success that allows you to support your family and even your future generations. Unfortunately, not every small business meets with success. Debt such as commercial leases, supplier contracts, and business loans can exceed income until bankruptcy is the only viable solution.
If you run a sole proprietorship, then declaring Chapter 7 bankruptcy will also affect you personally. This is because there is no financial separation between you and the business. Just as you are entitled to all profits, you are also directly responsible for all losses. When a sole proprietorship declares bankruptcy, it is essentially the same as a personal bankruptcy for you, meaning that both personal and business debts will be discharged. This may include:
- Credit card debt
- Unsecured personal and business loans
- Unpaid commercial rent
- Unpaid business invoices
- Legal judgments against you and/or the business
Before being allowed to file, you must pass a means test to confirm that your income is at or under the New York State median income. Anything you earn as a sole proprietor must be included as personal income, and your business expenses have to be included in the required expense sheet.
After you file
If you file for Chapter 7, then a trustee will be appointed to your case. You may be asked to close your business down, at least temporarily, so the trustee can assess your debts and ensure that you don’t accumulate new ones. (If your business is your sole source of income, then this can pose a financial hardship, so many trustees use their discretion in this area.) If you are a consultant or freelance professional without assets like equipment or a storefront, then you may be allowed to stay open, but any profits you realize will become part of the bankruptcy estate.
Your trustee will also review your assets, determine which ones are exempt, and assign a potential sales value to the rest. Both federal and New York State bankruptcy exemptions provide degrees of protection for your personal property, so contrary to popular belief, declaring bankruptcy will not cause you to “lose everything.”
When you use state or federal exemptions to protect your assets, it is possible that you won’t lose anything at all, and once you receive your discharge, you can decide whether or not you want to continue in business or become an employee once more.
If you are a sole proprietor who is thinking of filing for Chapter 7, then it is important that you schedule an appointment with a New York bankruptcy attorney who can review your situation, explain your options, and recommend the best course of action for eliminating your debt. Jayson Lutzky has offered quality legal services for over 34 years. He offers free in-office initial consultations to help you decide if Chapter 7 is right for you. Call 718-329-9500 to learn more or visit www.mynewyorkcitylawyer.com.