Many entrepreneurs start small businesses and run them as sole proprietorships, only to find that the business has not been as successful as hoped. Filing for personal bankruptcy can be used to exit the business in these situations because the debts of a sole proprietorship are personal liabilities, and most of these entrepreneurs provide personal guarantees when they receive loans. A Chapter 7 filing allows entrepreneurs to obtain a fresh start by discharging all their unsecured debts, but they typically must give up any nonexempt assets. The filer’s future income is protected, but there may be other potential problems. If you are an entrepreneur filing for bankruptcy, an Alabama bankruptcy lawyer at Grainger Legal Services can offer knowledgeable advice, counsel, and representation during this process.
An entrepreneur who cannot meet his or her financial obligations can either reorganize for a fresh start under Chapter 11 bankruptcy or dissolve and file for Chapter 7 bankruptcy. There are advantages and disadvantages to each of these types of bankruptcy, but generally Chapter 7 is considered easier than Chapter 11. Both of these chapters are part of federal law. However, Alabama state law will determine which exemptions are available to an entrepreneur who files for Chapter 7 bankruptcy.
In Chapter 7 bankruptcy, all of your debts will be fully discharged at the end of a process that lasts a few months, even if you have no money or assets to pay them off. An entrepreneur’s property and assets that are nonexempt are placed into a bankruptcy estate. A trustee is appointed to control the bankruptcy estate and handle the partial or full repayment of creditors. The trustee sells property in the bankruptcy estate, and the proceeds of the sale are used to pay back your creditors. You will not have any control over the priority of sales or the repayment of creditors. These decisions are made by the trustee rather than you, but can still have an impact on your business relationships.
However, state exemptions allow you to protect a certain amount of your property based on the idea that a fresh start is not useful unless you have the bare minimum needed to move forward.
When you file for bankruptcy, an automatic stay goes into effect. This means that creditors’ efforts to collect debts are stopped, and these efforts can only be resumed once the bankruptcy court or law permits. If the debts are discharged through the Chapter 7 process, the entrepreneur stops having any liability for those debts that were discharged. In most cases, creditors do get paid back a certain amount from the sale of the entrepreneur’s nonexempt property and assets.
Generally, entrepreneurs who have previously filed for bankruptcy can still obtain health insurance for a new business and achieve success with a different business. However, studies show they are more likely to be denied loans and charged high interest rates. While bankruptcy is supposed to provide a fresh start, it can affect your immediate prospects after you have filed.
As an entrepreneur, you may have plans for starting another business in the future. Bankruptcy promises a fresh start that can allow you to obtain discharges of your consumer debts and personal liabilities. However, there can be some disadvantages for a small business owner who plans to start another business. At Grainger Legal Services, Alabama bankruptcy attorney Charles E. Grainger can counsel entrepreneurs filing for bankruptcy and guide them through the challenging process of obtaining a discharge of their consumer debts. We maintain offices in Prattville, Montgomery, and Troy. Call us at (334) 260-0500 or contact us online to schedule a free consultation with a debt relief attorney.