If you are self-employed or a small business owner, personal bankruptcy could have larger implications outside of your personal finances. If you file for bankruptcy in New Jersey, your ownership interest in your business could be considered an asset and part of your bankruptcy estate. If you are expecting to go through personal bankruptcy and worried about how to protect your NJ small business, here are some things to consider.
1. What kind of business do you have?
If your small business is a sole proprietorship, you and your business are legally considered one entity. Your personal assets and those of your business are one and the same. This means that any asset of the business is considered your asset and can be sold to pay off creditors (unless it is exempted - more on this below). Similarly, an LLC or "sub S" corporation is considered a closely held business. So while an individual owner cannot be held liable for the debts of the business, the assets of the business can be liquidated in Chapter 7 bankruptcy.
2. When can a bankruptcy trustee NOT sell your business?
If you are the sole owner of your business, your bankruptcy trustee can look into selling the business to liquidate assets to pay off debts. This may not be a viable option if:
(a) The debtor/owner can use state or federal exemptions to exempt the business assets
(b) The cumulative debts of the business exceed the assets
(c) The assets have no value outside of the business
(d) Co-owners of the business exist, who are not filing for bankruptcy, and do not consent to a liquidation of the business.
3. Is your business still profitable?
If your business is failing and you see bankruptcy as a way back to financial security, making your business part of the bankruptcy estate may not make a difference to you. If, however, your business is thriving and you still derive significant income from it, filing for Chapter 7 bankruptcy could put you in a more precarious financial position.
4. Can you afford Chapter 13 bankruptcy instead?
Chapter 13 bankruptcy allows the debtor to pay back debts over a designated period of time under an agreed upon plan to reorganize their debts. Your debts, assets, and potential sources of income will be taken into account. As a small business owner, you will be able to exempt certain assets and property to protect them from being included in the bankruptcy estate—which can include assets from your business. Any non-exempt assets of the business will be used to determine how much of your debt should be paid to creditors.
There are many ways filing either Chapter 7 or Chapter 13 bankruptcy can impact your small business. Even filing for Chapter 13 can be complicated and will require significant planning. Veitengruber Law can help you explore all of your options and find the best ways to protect your NJ small business and your personal finances.