People have many concerns about filing for bankruptcy, from what happens to their assets to how long the matter stays on their credit report. If you are an owner of a company, you face additional, unique challenges with how bankruptcy in Arizona will impact your business. It is likely that you are considering either Chapter 7 or Chapter 13 for personal bankruptcy, and it is true that the US bankruptcy laws could affect your case.
However, the effects on your company may not be significant, especially when there are legal protections. As compared to the benefits of filing for bankruptcy, the implications on your business might be nominal. From a personal standpoint, bankruptcy offers a fresh start and a solid financial future. In many cases, you can either discharge a debt or work out a debt repayment plan, depending on eligibility. You can even be a better business owner without the burden of debt holding you down.
If you are considering bankruptcy and want to know more about the effects on your company, it is crucial to consult with an Arizona bankruptcy attorney who will provide personalized advice. You will need guidance with Chapter 7 or Chapter 13, and assistance with the process is essential. In addition, some answers to frequently asked questions should provide background on bankruptcy and your company.
How is your business organized?
An initial consideration with personal bankruptcy and your company is its organization, which is governed by Arizona laws. The legal formation of the business is important, and the most common options include:
- Sole Proprietorship: There is one owner of the company, and it is you. However, as an owner, you have not gone through the steps of creating a legal entity separate from your own interests. Even if you work under a different business name or have a company account, the asset is yours personally.
- Corporation: Many business owners organize as a corporation to create the legal separation not provided by a sole proprietorship. When the company is liable for a debt or obligation, the personal assets of the shareholders are protected. However, the details are different when it is the owner of the corporation who has personal debt.
- Limited Liability Company (LLC): An LLC is similar to a corporation in the sense of limited liability for owners. Members of the LLC do not have to worry about the company’s debts touching them personally, but an owner’s personal bankruptcy may impact the business.
Do you qualify for Chapter 7 bankruptcy?
Chapter 7 is the type of bankruptcy that eliminates your debt once the case is complete. US bankruptcy laws require the bankruptcy trustee to sell off or liquidate certain assets to satisfy the debts of creditors, but most proceedings are no-asset cases. You protect designated property, and the rest would not be worth the bankruptcy trustee’s efforts to sell. Eligibility includes the following criteria:
- Your current monthly income is less than the median income for Arizona, compared to a family of your size..
- If your income is higher than the median, you can still qualify through the means test. This analysis measures your income after paying certain expenses.
If you are eligible for Chapter 7, the effects on your corporation or LLC will vary according to your ownership. The bankruptcy trustee can take over the company when you are the only owner or majority shareholder. This could lead to a decision to liquidate the business to satisfy the claims of creditors. When your interest is less than 50 percent, the bankruptcy trustee cannot force a sale. Your stock becomes part of the bankruptcy estate but is probably of little value for purposes of liquidation.
Are you eligible for Chapter 13 debt repayment?
Individuals who do not qualify under the current monthly income assessment or the means test may qualify for Chapter 13. You might also consider it if you have considerable assets that you could not protect and would be liquidated in Chapter 7. With this type of bankruptcy, a filer works out a debt repayment plan to pay back some of the amount owed. The plan states what must be paid per month, over a period of three to five years. You could be eligible if:
- You have debt below thresholds stated in bankruptcy rules;
- You are current on tax filings; and,
- You have a regular income that enables you to pay the amounts required under the debt repayment plan.
For those that meet these criteria, Chapter 13 may be a wise choice considering the impacts on your company. Keep in mind that your governing documents for a corporation or LLC may mandate that you sell your interests if you plan on filing for bankruptcy. There are complicated issues involved with multi-owner companies and a stakeholder’s filing for personal bankruptcy, so trust an Arizona bankruptcy attorney for assistance.
How does bankruptcy work for sole proprietors?
Chapter 7 is an option for individuals who operate their businesses as sole proprietorships, but you do face some risks. The bankruptcy trustee is in charge and may close the business to assess its value to the bankruptcy estate. You might not be able to operate your company for a few months. Plus, because all business assets are personal assets, they are subject to liquidations. If you have expensive equipment or inventory, you could lose some value. However, your own personal debts and those of the business are fully discharged at the conclusion of the Chapter 7 case.
Many sole proprietors choose Chapter 13 debt repayment because it offers the most favorable impacts on the company. All of your debts, both personal and business, are included in the plan as if you are a single filer. Your monthly payments for the debt repayment amount are distributed among your creditors. Note that you do not have the power to prioritize your own debts versus the company’s. The basic priorities for the debt repayment plan are:
- Priority debts, including child support, personal income taxes, and business taxes;
- Secured debts, such as loans on vehicles; and,
- Non-priority, unsecured debts including personal and company credit cards.
Does bankruptcy stay on my credit report?
There will be a notation on your credit report when you file for bankruptcy, and the matter does affect your credit score. The length of time it stays on your credit depends on which type of bankruptcy you choose.
- With Chapter 7, a bankruptcy case is on your credit report for 10 years. The clock starts on the date you file your petition for bankruptcy. Chapter 7 is considered a somewhat harsh remedy from the viewpoint of creditors, which is part of the reason for the long duration. Another factor is that bankruptcy laws want filers to consider the consequences carefully before going through the process.
- A Chapter 13 debt repayment plan will stay on your credit report for 7 years. Again, the date you file is when the clock begins to run. The reason for the shorter time period compared to Chapter 7 is that you are paying back at least some of your debt with Chapter 13.
What are the steps for filing for bankruptcy?
As a personal filer and business owner, you should be prepared to go through the following steps for Chapter 7 or Chapter 13 bankruptcy.
- Preparing to File: You must gather all documents related to your assets, debts, income, and taxes as you get ready to file. Plus, you are required to complete a credit counseling course within six months prior to filing.
- Filing and Initial Steps: There are different forms for Chapter 7 and Chapter 13, but you must provide a considerable amount of financial information in your bankruptcy petition. It is also necessary to supply supporting documents and complete the relevant schedules. On the date that you file, the automatic stay on creditor efforts to collect a debt goes into effect.
- Bankruptcy Case Proceedings: During Chapter 7, the bankruptcy trustee takes over your assets and assesses them for purposes of liquidation. With Chapter 13, the trustee will analyze assets and debts to come up with a debt repayment plan. In both cases, there is a 341 meeting with creditors.
- Conclusion: Chapter 7 discharges the debt, while Chapter 13 eliminates unsecured, non-priority debt after completion of the debt repayment plan. However, Chapter 13 cases do not conclude until after the debt repayment plan is complete, which will be three to five years.
Can a business file for bankruptcy?
The above information applies to individuals who are considering bankruptcy to address personal debt, as opposed to business owners who seek bankruptcy for the company as a legal entity. A corporation or LLC is not eligible for Chapter 13 but could qualify to file for Chapter 7. This may not be advisable for numerous reasons, and discharge bankruptcy does not actually eliminate the obligation for individual owners.
Chapter 11 is akin to Chapter 13, only it is for businesses instead of individuals. It is a reorganization bankruptcy that enables the debtor to continue to run the company, with monthly amounts going to creditors under the debt repayment plan. Filing Chapter 11 for your business may be an option to consider alongside personal bankruptcy.
Discuss Options with an Arizona Bankruptcy Lawyer
These answers to common questions about bankruptcy and your business are useful as a summary, but the details are important for your personal situation. The goal would be imposing zero or minimal impact on your company while ensuring you gain the advantages of bankruptcy. For more information, please contact DebtBusters in Scottsdale, AZ. You can call (866) 223-4395 or check out our website to set up a free consultation with an Arizona bankruptcy attorney.
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