Are My Personal Finances Protected If I File For Bankruptcy For My Business?

When filing for bankruptcy for a business, it becomes very important to consider the legal structure of the business before moving forward. In many situations, both businesses and individuals will find that bankruptcy gives them the ability to work through financially difficult times and to improve their financial outlook. However, in some situations, personal property is not protected in business bankruptcy.

When Business Bankruptcy Affects Personal Property

Filing for bankruptcy is a big decision and one that requires a complete look at all of the financial circumstances surrounding an individual’s situation. Specifically, the individual should consider the implications on personal property when filing business bankruptcy, especially in situations of sole proprietorships and partnerships.

In these two types of business legal structures, personal and business property is intermingled. There is no official designation of the business legally and therefore there is no protection for the individual’s property unless the state the individual is filing is protects partnership property.

However, keep the following in mind:

In a Chapter 7 bankruptcy for a business, the personal finances and property are a part of the bankruptcy process. It all becomes bankruptcy estate, which means the bankruptcy trustee may determine it needs to be sold (unless it is protected under exemptions) to repay creditors.
In Chapter 13 bankruptcy, there is no liquidation of assets unless the borrower wishes to hand over those assets. Therefore, this is not likely to lead to liquidation of personal assets.
In all situations, the value of the individual’s personal finances will play a role in whether or not he or she can file bankruptcy and the options available to them for doing so.

In other types of business legal structures, such as a corporation, the individual’s personal property and finances are generally protected. However, if the court believes that an individual is trying to defraud or hide assets through personal finances, the court can dismiss the bankruptcy case and file fraud charges against the parties involved. In many situations, it becomes necessary to hire an attorney to determine the best route to take as a business owner.

When to Hire an Attorney

When filing business bankruptcy, it is critical to take into consideration the options available to the individual by the courts. However, mistakes are common in business bankruptcy cases for small businesses including sole proprietorships. Hiring an attorney is the best route to take to protect assets and to find the best financial recourse. Filing for bankruptcy with an attorney can protect assets and personal property in some situations.

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