If you run your business as a sole proprietor, you and your business are considered to be one and the same. If there are business assets, they are subject to being sold for the benefit of your creditors unless they qualify for an exemption. If, on the other hand, your business is service or profession oriented such as contractors, lawyers, accountants, electricians, real estate agents, and the like there are usually no assets worth selling and your business can continue without interruption. Retail businesses that have inventories or other assets that might generate income for the creditors typically must cease operations upon filing bankruptcy. This allows the trustee to inventory and value the assets as of the date of the bankruptcy filing and decide whether they are covered by any exemption you claim or whether they can be seized and sold for the benefit of your creditors.
A sole proprietor can file for bankruptcy under Chapter 7. The sole proprietor’s non-exempt assets will be seized by the bankruptcy trustee and sold to pay off the creditors. Since there is no difference between the business and the sole proprietor, the bankruptcy will seize the non-exempt assets of the sole proprietor.
The sole proprietor can file a Chapter 13 bankruptcy and pay off the business creditors under the payment plan. Unlike a Chapter 7 bankruptcy, the debtor in a Chapter 13 bankruptcy retains all assets so long as the payments under the plan are made.
Sole proprietors can also file for bankruptcy under Chapter 11 which is basically a form of reorganization. In a Chapter 11, the sole proprietor along with the trustee develops a reorganization plan that will pay off the debts. When a business files for bankruptcy under Chapter 11, it can continue its operations but the operations will be supervised by the court. Most sole proprietors do not file under this Chapter because it is very expensive and time consuming.