Protecting Personal Assets During Small Business Bankruptcy

When it comes to running a business, no one expects their venture to lead to bankruptcy. However, if you've experienced financial hardship and your small business is not thriving the way you had hoped, filing for bankruptcy is sometimes the best option. 

Whether full- or partial-scale operations are in play with your company, understanding how to protect personal assets while declaring corporate insolvency can be crucial to ensuring that any lingering losses don't affect your home finances too badly. There's much more than meets the eye when it comes time to start navigating through the proceedings of a small business bankruptcy.

Understand the Basics of Small Business Bankruptcy

Sometimes even the most well-run companies can run into financial troubles. Bankruptcy can seem like a scary prospect, but it's important to understand the process and your options as a small business.

Types of Small Business Bankruptcy

There are two main types of bankruptcy for small businesses: Chapter 7 and Chapter 11. 

  • Chapter 7: Chapter 7 bankruptcy is also known as liquidation bankruptcy; the business assets are sold off and the proceeds are used to pay off debts. As an individual,

  • Chapter 11: Chapter 11 allows the company to reorganize debt and continue operating while it works to pay back its debts. In Chapter 11, a business can be approved to continue borrowing new money while in operation.

  • Chapter 13: Chapter 13 bankruptcy can allow you to keep business assets while reorganizing debt and implementing a repayment plan to tackle debt.

Is your company financially secure? Visit this Emergency Financial Checklist for Businesses from the expert accountants at LedgerGurus.

How to Choose the Right Bankruptcy for Your Business

It's important to consult with a bankruptcy attorney to determine which option is best for your business. Don't let the fear of bankruptcy prevent you from seeking help and finding a solution. If it’s possible for a business to recover from financial woes, Chapter 11 or 13 might be the best choice so you can stay operational.

Know Your Rights as a Small Business During Bankruptcy Proceedings 

It's important to know your rights during bankruptcy proceedings. While it can be a stressful and overwhelming time, there are steps you can take to protect your interests and come out on the other side in the best possible position. 

For example, you have the right to file a claim for any debts owed to you, and to have a say in any negotiations between creditors and the bankruptcy court. You also can challenge any actions that could be detrimental to your business. 

Personal Liability During Business Bankruptcy

Whether or not your personal assets are at risk during your business’s bankruptcy depends on how the business was formed. There are two common reasons why a person is liable for their business debt:

  • They signed a “personal guarantee” making them contractually liable for business debt.

  • They owe taxes related to the business.

  • They are the sole proprietor of the business.

If you have business partners, the type of partnership can determine who is responsible for business debt in bankruptcy.

  • General partnership: Typically created without any paperwork, this type of partnership is almost like a default. In a general partnership, each partner is equally liable for business debts.

  • Limited partnership: Composed of a general partner and a limited partner, the general partner is personally liable for business debts.

  • Limited liability partnership: In this partnership, all partners are exempt from liability.

By understanding your rights, you can navigate this complex process with confidence and ensure the best possible outcome for your business.

Prioritize Exempt Business Assets to Keep Them Safe

By prioritizing the exempt assets, you can ensure their safety even in the event of financial trouble. These assets are typically protected from creditors and bankruptcy, so it's essential to identify which of your business assets fall into this category. 

Examples of exempt assets include your primary residence, retirement accounts, and tools or equipment used specifically for your business. By taking proactive steps to prioritize these assets, you can rest easy knowing that they are safe and secure regardless of any unforeseen circumstances that may arise.

Consider Setting Up a Trust to Protect Your Assets During Business Bankruptcy

A living trust provides several benefits for small businesses. When assets are secured in a trust, they are no longer the property of the business owner. As a result, they’re protected from creditors in the event of bankruptcy. 

Before establishing an irrevocable trust, be sure it’s the best course of action for you and your business. Trust a financial advisor or attorney who can explain all the ins and outs of setting up a trust to protect your assets.

Make Use of Creditor Protection Laws as a Small Business During Bankruptcy

Creditor protection laws can shield assets from seizure by creditors during bankruptcy. The catch is that the “stay” order typically lasts only 10 days. This time should be used to prepare for further bankruptcy proceedings.

By understanding your options and working with an experienced bankruptcy attorney like the team at Rulon T. Burton, you can take steps to protect your business and emerge from bankruptcy in a strong position to rebuild and thrive. Don't let debt overwhelm your small business - take advantage of your legal options and protect your future.

Utilize Asset Protection Strategies to Safeguard Your Property as a Small Business During Bankruptcy

Bankruptcy can leave business owners in a precarious position, with potential creditors after their assets. In addition to creditor protection laws, another way to safeguard your property is by utilizing asset protection strategies. 

Asset protection strategies are the legal technique of moving asset ownership from one person (or business) to a different one. Assets can include your intellectual property, real estate, and personal property. This strategy can help protect your business from potential liabilities and lawsuits, providing peace of mind during such a tumultuous time. Properly using asset protection strategies can help save your hard-earned business investments.

Seek Professional Guidance for Small Businesses During Bankruptcy When Needed

Running a small business is no easy feat and when times get tough, it can be especially challenging to know what steps to take next. Sometimes bankruptcy may seem like the only option, but it's important to seek professional guidance before making any major decisions. In many cases, bankruptcy can be avoided altogether or at least minimized with the right help. Seeking professional advice can help you learn about alternative solutions, navigate complex legal procedures, and ultimately make better-informed decisions. As a business owner, it's important to recognize when you need help and not be afraid to reach out to professionals who can guide you through difficult times.

No comments