How do you protect your family from bankruptcy when owning and operating a business so risky? When you’re young and single, however, the worse case scenario is that your business fails. When you’re young you learn from your mistakes. You crash at a friends place until you get back on your feet.
That all changes when you have a family.
It’s one thing to move back home or stay at your best friends place for a short period of time, but it’s another when you have your spouse and a kid or two tagging along.
So, what do you do when your business is in such distress that you can no longer pay your creditors, employees, and other expenses? You may have no other choice but to shut down and declare bankruptcy. But, how can you make sure that your family is protected if you do declare bankruptcy?
Choose the right entity for your business.
First and foremost, when setting up your business think about the best possible legal structures for your business to operate under. A sole proprietorship, for example, may be your easiest option to start out as, specifically when you’re a freelancer or entrepreneur, but if you do declare bankruptcy your personal assets like your home may be jeopardized.
Instead, you should form a corporation, a limited liability company (LLC), or a partnership so that your personal assets and wealth are separated from your business’s assets. In short, if you do file for bankruptcy, your family should be protected from creditors. They won’t be able to go after your personal assets.
Don’t make business personal.
Even if you set up your business structure correctly, there’s still a chance that your personal assets could be seized if you use any personal property, like your home or vehicle as collateral, or sign any personal guarantees when applying for a loan.
Don’t make business personal. Keep your finances separate by opening a checking account and credit card specifically for your business. And, if possible, never use your personal property as collateral for business loans.
By not tying up your personal finances and property with your business’s not only protects you and your family, it also makes filing taxes and record-keeping less complex.
Protect Your Family From Bankruptcy – File for Chapter 13.
If you’re a sole proprietor, you may choose to file for either Chapter 7 or Chapter 13 bankruptcy. Both can be used for either personal or business debts.
However, as attorney Shannon Miehe reminds us in an article for Nolo.com, “If you’re a corporate shareholder, LLC owner, or partner in a partnership and you’ve signed personal guarantees or pledged collateral for business loans, putting your business through bankruptcy won’t protect your personal property.”
If you use Chapter 7 bankruptcy, “your assets (except for property that’s exempt under state or federal law) can be sold to pay off your creditors.”
With Chapter 13, you can work out a payment plan over the next 3-5 years to pay back all of your debt. This will permit the court to put an automatic stay that will prevent creditors from coming after your home.
At the very least, using Chapter 13 buys you a little more to figure out how you’re going to satisfy your debts without compromising the security and safety of your family.
Find out about your state’s bankruptcy exemptions.
Every state has laws that designate certain property. Laws like your home and some personal possessions, as off-limits from creditors that have a lien on your property. These are known as “unsecured” creditors.
For example, under California’s homestead exemption, a family can receive $100,000 in equity protection. Florida, however, will protect the total value of your home in bankruptcy.
As for other property:
- California protects heirlooms and art up to $8,000
- Health aides
- Motor vehicles up to $3,050
- Items like tools
- Equipment up to $8,000 total, or $14,975 total. This is if used by both spouses who are in the same occupation.
Keep in mind that you only have to be concerned about this if you go the Chapter 7 route. If so, do your research and find out what your state allows you to keep if you file for bankruptcy.
Consult with a qualified bankruptcy attorney.
The best chance that you have to walk away with an equitable settlement is by consulting with a qualified bankruptcy attorney. They’ll give you several options so that you can pick the one that’s best for you and your family.
When meeting with them, make sure that they are empathetic to your situation. Stress that you want to file bankruptcy without doing harm to your family, like losing your home.
Most importantly, before hiring any attorney, make sure that they’re dedicated to the practice of bankruptcy. You can verify that they’re certified in bankruptcy specialization by visiting your state’s bar association website.