The Difference Between a Business and Personal Bankruptcy

: Chris Lee Law Firm

  Filed under: Bankruptcy

Many entrepreneurs and sole proprietors are faced with a difficult decision each day: Should I file for bankruptcy? With nearly half of all new startups closing their doors within the first 5 years, there are many entrepreneurs whose financial situations are dire.

As national competitors increase and the economy struggles in its recovery, entrepreneurs are digging into debt to keep their businesses afloat. Sooner or later, however, the debt becomes unbearable and a bankruptcy must be filed.

So as sole proprietors who are directly tied to their business, many entrepreneurs ask: Should I file for a business or personal bankruptcy? What are the differences?

The Details of a Business Bankruptcy

While both types of bankruptcy allow for a Chapter 7  filing, only individuals can file for a Chapter 13 while a business files for a Chapter 11 bankruptcy. A business that filed for a Chapter 7 would be dissolved, which is why Chapter 11 is the better option of the two for most business bankruptcies.

Sole proprietors can use Chapter 7 or Chapter 13 as a business bankruptcy as well as personal debts solution. Using these options as a sole proprietor puts any assets in danger of being liquidated by your creditor.

The biggest differences between a personal and business bankruptcy is the means test. Individuals applying for Dallas bankruptcy have to pass the means test in order prove that they are eligible. Businesses on the other hand don’t have to prove this, if they file for a Chapter 11 business bankruptcy. Furthermore, businesses can also cancel contracts with their creditors if it is mutually beneficial for both parties. Individuals filing for bankruptcy are bound by any legal obligations agreed upon during the bankruptcy process.


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