Sole Proprietorship

• In a sole proprietorship, you own your business assets and you're personally responsible for any debts your business can't pay. If you file Chapter 7 bankruptcy, a court trustee has the power to pay your creditors by selling off your business and personal assets. State or federal law may protect some assets, such as "tools of the trade," from sale. Bankruptcy doesn't prevent you continuing in business, but if your assets aren't exempt, you could lose the equipment you need to stay open.
  
  

Corporation

• Incorporating turns your business into a separate legal entity. You aren't liable for corporate debts, and the business isn't affected by your personal debts. In Chapter 7, however, the trustee may be able to sell your stock in the corporation like any other asset, unless it's covered by an exemption. Even if the shares aren't exempt, if the shares aren't worth much, the trustee might decide it's not worth the effort of selling them.
  
  

Chapter 13

• In Chapter 13, the trustee doesn't touch your assets. Instead, you agree to a three- or five-year payment plan in which all your disposable income goes to your creditors. If any of your creditors have claims on your business assets, such as a car loan on a business vehicle, you can make up any missed payments over time as part of the plan. Bankruptcy law allows you to subtract business expenses from your monthly income along with living expenses in order to determine disposable income.
  
  

Considerations

• As sole proprietorship debts are all personal debts, wiping them out could put your business back on a sound footing. Keep in mind that some debts will survive the bankruptcy discharge. Back taxes usually survive, and debts resulting from fraud do too. If you try to pay off debts to business associates in the year before you file bankruptcy, the trustee has the power to void the payment and share the money equally among all your creditors.