The Vida Law firm PLLC

I have a small business and run it as a sole proprietorship. I have debt for the business. Can I file
bankruptcy on the business debt and not for myself?

No. A sole-proprietorship essentially means that you are the business. You file taxes as a self-employed individual but do not have a separate legal entity like a corporation set up for your business. It is common for people to operate businesses as sole-proprietorships. You may have incurred debt that directly relates to your business such as leases, credit cards, vendors, bank loans, equipment loans, and tax debt. You do have personal liability on the debt even though it was for a business purpose. Filing for bankruptcy as an individual will help you to reorganize or eliminate this business debt while still maintaining some of your personal debt, like your home mortgage. Depending on the type and amount of debt, the bankruptcy may be filed as a “business case” meaning that the majority of your debts are not consumer debts. Filing bankruptcy does not mean that you will lose your business, either. You may still be able to operate and maintain control of your business assets and accounts while you are in bankruptcy. Every business is different. Bankruptcy can be a useful tool in helping your business to survive in a difficult economy.

Please call my office for an appointment to discuss your options in managing your business debt.

I owe money to the IRS for self-employment taxes for several years. I heard that under the new bankruptcy laws, I cannot file bankruptcy on tax debt. Is that true?

No, that is not true. There is still a variety of relief available for tax debt under the new bankruptcy laws enacted in 2005. It is a common problem for self-employed individuals or individuals running a business to have tax liability issues with the IRS, the State Comptroller, and the local property taxing authorities. IRS problems could include non-payment of personal income taxes, and 940 and 941 taxes including interest and penalties. Other tax issues could involve state sales taxes and local property or business personal property taxes.

The relief available to you in bankruptcy will strictly depend upon your circumstances. You need to consult with an attorney experienced in handling taxing authorities. The first questions I will ask you in a consultation about IRS debt are: have you filed your tax returns that are due, when did you file them, and are there any IRS liens on your property? Some taxes can be eliminated or reorganized in bankruptcy. In addition, bankruptcy may provide relief on interest and penalties.

Bankruptcy can be a useful tool in helping your business to survive in a difficult economy. Please call my office for an appointment to discuss your options in managing your tax debt.

What is the difference between a business bankruptcy and a consumer bankruptcy?

A business bankruptcy can be filed by a legal entity, such as a corporation, but a business bankruptcy can also
be filed by an individual who has primarily “business debt”. Entities or individuals filing business bankruptcies may be attempting to eliminate or reorganize debt. A consumer bankruptcy is filed by an individual who has primarily “consumer debt”, which may include houses, cars, credit card debt, and medical bills. A consumer may need to be relieved of debt or may need to reorganize debt.

It is common for small business owners to have personally guaranteed their business debts such as SBA loans, leases, credit cards, or other bank loans. Typically, lenders and landlords do require such guarantees from an individual for business loans. If a business is not going well, the individual may need personal relief from the business debt to protect his personal assets; therefore, the individual may file a personal bankruptcy to receive relief from business and consumer debt.

The business itself, meaning the legal entity of the corporation or partnership, may also need to file a bankruptcy to handle debts of the business. A Chapter 7 bankruptcy is available to a business that is closing and liquidating assets. A Chapter 11 bankruptcy is available to a business attempting to stay open and reorganize debt or attempting to close and liquidate assets.

Please call my office for an appointment if you or your business are experiencing financial distress and unable to
service debt.

I own a business that I think needs to file bankruptcy. What is the difference between a Chapter 7 and a Chapter 11?

Businesses that are corporations, partnerships or limited liability companies may file Chapter 7 or 11 in bankruptcy. Chapter 7 is a liquidation bankruptcy. It means the business is closing, and all of the assets will be liquidated to pay creditors. Secured creditors and tax authorities get paid before unsecured creditors. Corporations may not protect, or exempt property—all assets will be liquidated. An individual person who has guaranteed payment of debt, such as a bank loan or a lease, will not receive relief from the liability of the debt unless the liquidation of the assets satisfies those debts in full. This is a common situation with small businesses. Individuals may end up filing bankruptcy to manage the business debts for which they may be liable. Chapter 11 is a reorganization bankruptcy. It means the business is attempting to stay open and actively operating, but it is reorganizing debt in some way. Generally, in a Chapter 11 the old management stays in control of the business subject to certain rules and restrictions. The business will be given time to propose a plan of reorganization which may or may not pay all creditors in full. The creditors get to vote on the plan of reorganization. The plan can be approved either by the vote and consent of the creditors or in certain circumstances it may be approved by the Bankruptcy Court over the objection of the creditors. The approved plan of reorganization will be a contract between the business and its creditors which will replace all the old contracts which the business used to have with its creditors. Bankruptcy can be a useful tool in helping your business to survive in a difficult economy. Please call my office for an appointment to discuss your options.