Bankruptcy and Sole Proprietorships

Sole-Proprietors and Bankruptcy

Sole-Proprietors who file for bankruptcy with outstanding business loans, may need to surrender business equipment to the bankruptcy trustee depending on what type of bankruptcy they file and whether or not then intend to remain in business and if they need the equipment to keep operating their business.

If the Sole-Proprietor Files for Chapter 7 Bankruptcy

For example, if a sole-proprietor took out a business loan to purchase business equipment that equipment would be treated differently depending on what type of bankruptcy the debtor filed.  If the sole-proprietor files for Chapter 7 bankruptcy with the intention of closing their business, then the bankruptcy trustee may demand that all business equipment be surrendered to the bankruptcy estate, sold to the highest bidder and the proceeds used to repay their creditors.

Chapter 7 bankruptcy for businesses basically means that the business is being liquidated completely and this does not change when it concerns sole-proprietors.

If the Sole-Proprietor Files for Chapter 13 Bankruptcy

On the other hand, if that same sole-proprietor decides to file Chapter 13 bankruptcy and decides to keep their business open, there may be an opportunity to keep their business equipment and work out some type of settlement agreement with the lender; but it will depend on one major factor-whether or not the debtor is delinquent or not on their business loan payments at the time of filing Chapter 13 bankruptcy.

If the debtor is not delinquent on their business loan payments when they file for bankruptcy, the lender may be willing to work out an arrangement where the debtor-business owner can keep the business equipment and continue to pay the loan during their Chapter 13 bankruptcy.

If the Debtor is Delinquent on Their Business Loan Payments

If the debtor is delinquent on their business loan payments, the lender may not be as willing to work out a repayment arrangement if they do not believe the business is viable or that the debtor can repay as much as they would get from liquidating the equipment in bankruptcy.

But even if the debtor is unwilling to convince the creditor that working out an arrangement would be in their best interests, the debtor may be able to convince the bankruptcy trustee that allowing the debtor to keep the business equipment is necessary for them to continue operating their business and that their business is what will allow them to successfully make Chapter 13 bankruptcy payments.