Unlike most other business structures available in Texas, there is no legal distinction between the sole proprietor of a business and the business itself. This means that, in order to pay off business debts, a sole proprietor may have to sacrifice personal assets, whereas the owner of an LLC or corporation would enjoy limited liability. If neither the income from the business or the owner’s personal assets are sufficient to cover the debts, bankruptcy may be the only course of action.
According to Chron.com, a sole proprietor may have multiple options when filing for bankruptcy. Because the law does not distinguish between the individual person and the business, a sole proprietor may be able to file either Chapter 7 or Chapter 13 bankruptcy.
That does not necessarily mean, however, that the sole proprietor gets a choice between the two. Chron.com goes on to explain that each has unique eligibility requirements. Chapter 13, the method of bankruptcy most frequently used, requires that the combined total of the sole proprietor’s unsecured debts equals less than $336,900. Chapter 7 eligibility depends on the median income in the filer’s area. An individual who earns less than 50% of it qualifies for Chapter 7.
Chapter 7 bankruptcy seeks to liquidate, or sell off, nonexempt assets to pay back creditors. Many debts are eligible for discharge if the proceeds from the sale of assets are not sufficient to cover them. This may include some tax debts, with self-employment taxes being an exception.
Rather than liquidating assets, Chapter 13 involves reorganizing debts into a repayment plan that allows the sole proprietor to pay off creditors over time. Though Chapter 13 offers potential benefits to the sole proprietor, business tax relief is not one of them.