Personal Bankruptcy and Small Business

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How a personal bankruptcy will affect an ownership interest in a small business is dependent on the type of business as well as what form of bankruptcy (Chapter 7 or Chapter 13) is filed.

Types of Bankruptcy

These are the most commonly filed forms of bankruptcy for consumers:

Chapter 7: the debtor’s assets are liquidated and proceeds are used to pay back creditors.

Chapter 13: the debtor pays back creditors through a repayment plan. A bankruptcy trustee is appointed to oversee the repayment.

Ownership Interest in Chapter 13

Because Chapter 13 calls for a repayment plan, business assets and ownership can be affected. This is because income and assets from a business will move from the titled owner to a bankruptcy trustee.

Small businesses are most commonly either: sole proprietorship, corporations, or limited liability companies (LLCs). Corporations and LLCs usually exist independently of the owner. That means that an owner is not personally liable for the business’s obligations, and thus a business is not liable for an owner’s personal obligations. Often times, closely held corporations do not have this protection. If an owner of a corporation or LLC declares bankruptcy, typically only the owner’s ownership is affected. A business is able to be operated normally, but if an owner’s ownership is large, and they have a substantial stake in the company, then that can be seen as an asset in bankruptcy, and is thus affected.

In a sole proprietorship, the owner is also the sole proprietor, and there is not legal distinction between the two. There are state by state exemptions, so you will want to work with a bankruptcy attorney if you are considering bankruptcy. Often times, when a sole proprietor files for bankruptcy, his or her business is affected just as a house or care would be. The business is considered another asset.

Ownership Interest in Chapter 7

In Chapter 7 bankruptcy, the net value of an owner’s interest is assessed along with other assets. It will then be determined what creditors would receive as a result of the liquidation of the company.


In a sole proprietorship, the company is an asset and thus will be considered as part of its owner’s bankruptcy. A corporation or LLC can be affected by a Chapter 7 filing. This is if the business has a positive net value and is considered an asset of the debtor. This is rare though.

In a Chapter 13 filing, the a debtor’s ownership interest in an LLC or corporation will most likely not be taken into account, as the corporation is separate from the debtor. The income the debtor earns though from the business will be considered when it comes to structuring a repayment plan.

Working with a Bankruptcy Attorney

Bankruptcy can be an overwhelming process. That’s why we advise that you work with a phoenix business bankruptcy lawyer that is familiar with various debt repayment options. We are committed to helping our clients understand their rights and options under the bankruptcy law and developing the debt relief solution that makes the most sense for each individual. We invite you to call (602) 648-3274 or contact our Arizona office to schedule a free initial consultation.

AZBK Lawyers

668 N. 44th St., Ste 320, Phoenix, AZ 85008

(602) 648-3274

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