New Year Resolution #8: Close Down Your Unprofitable Business While Protecting Yourself and Your Assets from Your Debts

If you’ve decided to close down your business, or would if you could avoid its debts, or had a way to pay its taxes, consider bankruptcy.

 

It’s Time to Throw in the Towel

It’s hard to let go of something you’ve invested so much time and energy and money in. But you’re trying to face the reality that your business is not providing enough money for you to live on. And it’s just not heading in the right direction. In your head you know that continuing to try to push the business forward is no longer realistic, but your heart is reluctant to let go.

Or maybe both your head and heart are both accepting that you need to close the business, but you are afraid of the consequences. You now owe so much money—from setting up and running the business and from keeping your head above water while it’s not been profitable—that you don’t know what will happen if you threw in the towel. And maybe you have some assets—business and/or personal—that you don’t want to lose by filing bankruptcy, so you don’t want to go there. 

But if you had a way to close your business which would assure that you and your assets could be protected and that you could afford to pay those debts that you want to or have to pay—like your home mortgage and unpaid income taxes—you would seriously consider such an option.

Small Business Debts Are Almost Always Your Personal Debts

You likely already know that your business’s debts are very likely your personal debts, too.

If your business is in the form of a sole proprietorship, the business and you are the same legal entity and so you are personally liable on all business debts. And if your business is in the form of a corporation then, although the corporation is a legal entity separate from you, most or all of the corporation’s creditors likely required you to personally guarantee its debt—making you personally liable.

So, whatever legal form your business was set up in, you are very likely personally liable on all or most of the business’ debts. And most likely you have your own huge direct personal debts on top of the business ones. That means two things:

• that you could well need a personal bankruptcy to protect you from the debts of your business; and
• that a personal bankruptcy would likely be enough, without the business filing its own bankruptcy—a sole proprietorship can’t file its own bankruptcy because it is merely an extension of yourself and not its own legal entity, and a corporation can file bankruptcy but likely has no need to unless it owns substantial assets.

Business Assets that You Need Can Usually Be Protected

In most situations, if you need to keep assets of the business (or for that matter your own personal assets) which you are afraid of losing in a bankruptcy case, you will be able to keep those assets.

In most states you are entitled to keep business assets that you need at a new job or new business venture through a “tool of trade” exemption. That means that even if you file a Chapter 7 “straight bankruptcy” case, also called “liquidation” bankruptcy, those assets would not be liquidated but rather would be protected for you.

And if the assets that you want to keep are worth too much so they exceed the allowed exemption amount (which can vary state to state), or for some reason those assets do not qualify for the “tool of trade” or any other exemption category, a Chapter 13 “adjustment of debts” case can be a good way to keep such “non-exempt” assets.

Chapter 7 to Discharge All or Most of Your Debts

Generally, Chapter 7 is for situations in which you want to permanently write off (“discharge”) all or most of your debts, both business-derived and personal, and then deal directly with any debts that aren’t discharged.

All creditors must stop all collection actions against you and your assets the moment a Chapter 7 case is filed. That includes both personal debts and those business debts that you are personally liable on. Creditors on corporate debts can keep pursuing your corporation and its assets, but in most situations when a corporation is closed and dissolved there are no meaningful assets left for a creditor to bother chasing.

You have the choice usually of keeping or surrendering collateral on secured debts, remaining liable on debts with collateral you keep—like a vehicle loan or mortgage. Special types of debts that cannot be discharged, such as recent income taxes, continue to be owed after a Chapter 7 case is done. Often the discharge of the other debts leaves you able to afford to pay off the taxes and other non-discharged debts through monthly instalment payments.

At the end of the usually 3-4 month Chapter 7 case, you would no longer owe any personal or business debts—except those few that you would want to still owe or the law does not let you discharge. You will often get the fresh financial start you need, and a relatively clean break from your former business.

Chapter 13 to Deal with Income Taxes and Other Special Debts

If the amount of debts that can’t be discharged—such as recent income taxes, all payroll taxes, past due child support—is too large for you to be able to handle on your own by directly negotiating with and paying the creditor(s), the 3-to-5-year Chapter 13 option provides much more protection. Payments to such creditors are made through a master payment plan based on your budget, with some creditors usually being required to wait until other creditors have been paid.

Chapter 13 can also be helpful with debts not directly related to your closed business, such as if your insufficient business income caused you to fall behind on your home mortgage, vehicle loan, or child or spousal support payments. You could catch up on those debts, again based on your ability to pay. And you’d get years of protection while doing so.

As mentioned above, Chapter 13 is also a good way to keep assets—both business and personal—which exceed or do not qualify for the available property exemptions. You may even be required to file a Chapter 13 case if you don’t qualify for Chapter 7 based on your income, if, for example, you closed your business and got a job paying you relatively well.

At the end of a successful Chapter 13 case, you would likely owe no debt, except long-term debt that you want to keep like your home mortgage. Although taking much longer than Chapter 7, Chapter 13 takes care of more kinds of debt, including those—like taxes—common to owners of recently closed businesses. When you are done, you really do have a fresh start.