Chapter 7 or Chapter 11: Choosing for Your Sole Proprietorship

If you are a sole proprietor and you are facing financial trouble either personally or for your business, you may wonder about chapter 7 chapter 11 options. There are some significant differences between chapter 11 and chapter 7 and you will need to understand these differences in order to determine how best to help yourself and your business. 

Chapter 7 Versus Chapter 11

• Chapter 7 is a form of personal bankruptcy used to liquidate debt. To be eligible, you must pass a means test wherein your income is compared to the median in the state. If your income is above the median, your available income after expenses is assessed to determine if you can reasonably afford to pay some debt. If you pass the means test and show you don't have enough money to pay back debts, then your debts are forgiven. However, there is a catch... assets are seized and sold in a bankruptcy sale in order to pay off some of your debts before they are discharged
• Chapter 11 is a form of business bankruptcy used when a business is a separate legal entity (i.e. a corporation). It is usually used for larger businesses and involves a restructuring of business debts and a plan to adjust the way a business functions financially so the business can stay in business. 

As a sole proprietor, filing chapter 11 is rarely if ever an option. Your business likely won't qualify, since your business assets and debts and personal assets and debts are one in the same as a sole proprietor. In addition, the complexities of meeting the chapter 11 requirements, including creating the plan for restructuring the business, can become too much for a small business owner. The cost of a chapter 11 is also prohibitive.

If you wish to reorganize your business debts instead of liquidating the assets and discharging the debts, you are better off considering a chapter 13 over a chapter 11. This is another option for individual bankruptcy that allows you to keep assets and to enter into a 3-5 year repayment plan.

Getting Help

If you are considering any type of personal or business bankruptcy, you will want to get help from an attorney. A qualified lawyer can explain your options to you and can help you to determine the best way to restructure your business and save your company and your personal finances.