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The effect of Chapter 7 bankruptcy on a business

Some Kentucky business owners who are unable to pay their debts might be able to keep their business even if they file for Chapter 7 bankruptcy protection. The determining factor in whether a business can stay in operation is the type of business entity. Owners of sole proprietorships are in some cases able to keep their businesses while partnerships, LLCs and corporations are required to liquidate their assets and close their doors permanently.

Partnerships, LLCs and corporations are treated as separate entities under bankruptcy law. Therefore, when a business owner with one of these legal structures has trouble repaying their debts, they must file bankruptcy under the business's name. However, sole proprietorship owners can use personal bankruptcy to get relief from their business debts. There are a number of exemptions that allow sole proprietors who file for Chapter 7 liquidation bankruptcy to retain some of their property. By claiming their business tools as exemptions, sole proprietors may be able to keep their business alive during and after the bankruptcy process.

The trustee is responsible for determining which assets are eligible for exemptions. When a bankruptcy petition is filed, a list of assets must be including in the paperwork. After the trustee is appointed, the asset list is compared to the list of legal exemptions.

An attorney who focuses on personal bankruptcy may help a client who is having trouble paying their consumer debts as well as the debts related to their sole proprietorship. In addition to helping a client decide whether bankruptcy is the most appropriate solution to their financial troubles, an attorney can describe the eligibility requirements.

Source: Houston Chronicle, "Can I Keep My Business If I File for Chapter 7 Bankruptcy?", August Jackson, accessed on Feb. 8, 2015

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