When times are tough for startups and small businesses, their owners can get hit hard financially. Those who pay themselves a small salary from their company's payroll can no longer afford to do so. Those who put all business profits directly back into the business, might no longer be able to cover basic expenses and utilities such as a home office. Many turn to personal bankruptcy rather than liquidating their small business to give it a fighting chance.
The reason for such a move generally lie in the fact that while your personal financial standing will take a dive, the small business is a legal and separate entity unto itself and doesn't have to be shut down or liquidated. If you're in a position as a startup business owner to file for personal bankruptcy, you can rest assure knowing your business will be safe as long as it remains a separate entity with it's own federal tax id number. This includes S and C corporations, Partnerships, and Limited Liability Companies. The exception falls within a Sole Proprietorship. Unlike other business entities, a sole proprietorship uses it's owner's social security number as its business id and is therefore viewed as an asset eligible for possession by creditors in a personal bankruptcy case.
You can and should continue operating your business as usual while filing for personal bankruptcy. Your creditors' only concern is whether you receive a personal income from that business (Learn how to earn income while trying to fund your startup). If you do, that income can completely be awarded to creditors to pay your outstanding debt or a portion can be garnished in a bankruptcy court judgement.
Is it possible to get a startup business grant or other funding while in bankruptcy?
The answer is yes. Unlike business loans which require certain degrees of good credit and collateral, grants and other startup business funding sources focus more on the business idea and its potential to create a return on investment. If you have a great business idea with solid customer or user interest, your chances of landing grants or other investment money are still realistic.
When filing for personal bankruptcy as a business owner, you'll generally be required to submit much more business related documents. A federal trustee will be appointed on behalf of your creditors and they will have done a background check into your financial history and any assets or businesses you have listed on public record.
Can you start a business while in bankruptcy?
You can start a business while in bankruptcy but any good bankruptcy attorney would advise you not to. That would simply complicate your case. Your goal is to clear your debts and keep and protect your business assets. A new registered business might not be declared on your bankruptcy filing for protection, allowing your creditors to go after it. It's best to start a new business after you've been discharged from chapter 7 or chaper 11 bankruptcy.
Items you must declare and submit to your bankruptcy lawyer
Business and personal tax returns for the previous 3 years from the date you're filing bankruptcy.
All statements of personal income spanning about 1 year (W2, Government assistance receipts, Alimony, Inheritance, Life Insurance, etc.)
Previous 9 to 12 months of business and personal banking transactions. The most updated banking statements will be requested as time progresses during the case.
- Names of individuals (If any) who give you regular financial assistance.