Chapter 11 Bankruptcy Information: 3 Tips for Sole Proprietors

Owners of small businesses know that there are a few different ways to legally organize a business, from a corporation, to a partnership, to a simple sole proprietorship. If your business is relatively small and you are the main person in charge, it’s fairly likely that you will at least begin operations as a sole proprietor. means that, if you are considering bankruptcy under chapter 11, you'll need to know chapter 11 bankruptcy information as it applies to a sole proprietorship.

Sole Proprietorship and Bankruptcy

Under a sole proprietorship, both the assets and the debts of the business and of the individual are considered one and the same. In other words, should your business be sued, it is your personal assets that are up for collection. Should your business fail and go into serious debt, it is you as an individual that would be filing for bankruptcy... but what kind of bankruptcy? Typically, as an individual, you have the option of filing for a chapter 7 (total liquidation), or a chapter 13 (repayment of certain debts and negotiation of others).  But there’s also a third option which many people don’t know about: the chapter 11 bankruptcy.

Chapter 11 is typically designed for use by businesses, and as such wouldn’t ordinarily be used by a sole proprietor, since under the definition of the law, such a business is still indistinguishable from the individual who owns it (thus making a chapter 13 more appropriate). However, recent changes to bankruptcy law have opened Chapter 11 bankruptcies up to individuals, meaning a chapter 11 filing is an option for a sole proprietor as well. So when would such a choice be appropriate?

• If your debt is too large for a chapter 13.

Chapter 13 bankruptcies have limits to how much debt the individual can be carrying. If you go over the amount (which changes per year; check with a bankruptcy lawyer for current amounts), you would typically be forced into a chapter 7. But a chapter 11 is also an option; it functions much like a chapter 13 but without the debt limitation.

• If you want to serve as your own trustee.

In a chapter 13 bankruptcy, a trustee is appointed bythe court to assist in setting up a repayment plan. In a chapter 13, a trustee may be appointed, but you may also act as your own trustee, and while your plan must still be approved by the bankruptcy judge, you’ll have a lot more say in how it is arranged.

• If you want to keep your assets – and you don’t mind the time and money.

A chapter 11 bankruptcy, like a chapter 13, lets you keep your assets and keep your business in operation. However, keep in mind that due to its nature a chapter 11 is much more expensive, complex, and time consuming than any other type of bankruptcy. If the benefits outweigh this particular negative, then it’s an option you should explore should you find your sole proprietorship in financial hot water.

Getting Help

When facing business bankruptcy, you should consult with an experienced lawyer as soon as possible. A lawyer can give you chapter 11 bankruptcy information and can also assist you in both deciding what type of bankruptcy is right for you and in moving through the filing process.