As a small business owner, falling on hard times economically can be extremely stressful and challenging, and it can mean making tough decisions. Faced with either business-related or personal debts that seem overwhelming and unmanageable, an option like bankruptcy, which may have once sounded like a last resort, can start to look like your best possible solution.

Bankruptcy has definitely offered struggling business owners the ability to stay afloat and keep their doors open, but for some individuals looking at this option, they may initially struggle with a choice: is it better to file for bankruptcy as an individual or a business?

There’s really no one-size-fits-all answer to that. Each person considering bankruptcy will need to judge their unique circumstances before making a decision, although a very smart place to start is to seek the advice of a seasoned bankruptcy lawyer fluent in the laws of their state.

What are the Advantages of Small Business Bankruptcy?

The relief that bankruptcy can provide to a small business will depend on what type of business you run. Let’s say you can’t make your payments because you no longer have enough cash flow. You can use Chapter 7 bankruptcy if you feel like you’re struggling with a failing business since it allows a bankruptcy trustee to sell off your business assets and distribute the proceeds to creditors. If you’re the sole proprietor of your business, that means you’re responsible for its debts, so if you file bankruptcy, all of your assets and debts – business and personal – get included in the filing. This is a way to wipe out your dischargeable debts, and in return, the trustee can sell any of your property not exempt by state or federal law. It’s a good solution if you have a lot of debt but few assets.

A good reason to consider a Chapter 13 bankruptcy — or Chapter 11 if your debts are greater than what’s allowed under Chapter 13 — is your business can continue operating. The difference, though, is your business must have enough cash coming in every month to cover monthly payments — which will be smaller than your current ones. That’s a good option if you want to keep the business open or you don’t qualify for Chapter 7 but need protection from your creditors.

Is It Better to File for Bankruptcy as an Individual?

Bankruptcy isn’t a good option for every business and these filings affect businesses in different ways. If you’re a sole proprietor, that means in the eyes of the law, your business is not a separate entity, so you’re fully responsible for its debts. As a result, any bankruptcy you file needs to include both your personal and business debts and assets.  

Businesses and individuals use bankruptcy as a tool for the same reasons: to get rid of debt that would otherwise go unpaid and receive a clean financial slate. But even if your business debts are considered your debts as the sole proprietor, it’s important to recognize that personal bankruptcy and business bankruptcy have different rules and chapters. They’re not the same things.

One reason why individuals often turn to Chapter 7 bankruptcy is that they simply have no hope of repaying the debt they’ve accumulated. Individuals without much income can use this to discharge debts. Individuals would use Chapter 13 bankruptcy if they had income but need to better manage their debt through a payment plan.

While businesses can file under Chapter 7, it could mean the dissolution of their business instead of a reorganization, which is why it might be better to file for Chapter 7 as an individual rather than as a business. 

On the other hand, Chapter 11 bankruptcy is for businesses that let you either reorganize or liquidate assets to repay debt, and most of the time, a Chapter 11 filing results in a reorganization. While individuals can file under Chapter 11, it’s far more complicated for them to do so, which is why people tend to opt more often for a Chapter 7 or 13 bankruptcy.

What are General Differences Between Business and Personal Bankruptcy?

Another important consideration in determining the difference between personal and business bankruptcy is what’s called the means test. Participation in the means test is required for individuals to determine if they’re eligible for a Chapter 7 or 13, while businesses don’t have to do this for a Chapter 11 filing. Businesses are also given the ability to cancel contracts with creditors if doing so would prove financially beneficial to both parties. That’s not an option available to individuals for debts that include student loans or any other type of debt that’s exempt from bankruptcy.

The bottom line: it’s important to get help from a bankruptcy attorney in your area before deciding to file for bankruptcy since this area of law is extremely complex. An experienced attorney can guide you on the best path to take.

Trust Our Experienced Bankruptcy Attorneys in Louisiana

When you’re considering this process, a good bankruptcy attorney can help you understand which approach to bankruptcy is going to work best for your situation. Orum Young Law has more than 35 years helping the people of Northeastern Louisiana file for bankruptcy and regain control of their finances. In those 35 years, we have filed more than 20,000 cases and experienced unbelievable success. We help our clients understand the basic aspects of their case, including how to determine their expenses and handle any necessary filings. 

Contact us today at (318) 450-3192 to schedule your free case review and start protecting your family’s future.