As a sole proprietor, all of the business risk falls on you because, legally, you and the business are one in the same. Any contracts you enter into or business debts you incur are your personal responsibility under the law. If your business fails and you can’t pay your creditors, you may have to file for bankruptcy to discharge the debt. A sole proprietor is personally responsible for the debts of the business, so the owner has to file for personal bankruptcy to discharge the debt. This means including both your business and personal assets in the bankruptcy along with business and personal debts.
When you file for Chapter 7 bankruptcy, all of your assets that cannot be claimed as exempt are liquidated to pay creditors. Legal exemptions protect certain assets from creditors and vary by state, but homes and cars are commonly covered to some extent. Exemptions for business assets are less common. In a personal bankruptcy filed by the owner of a sole proprietorship, both business and personal assets are liquidated and business and personal creditors share equally in claims against the sole proprietor when he files for bankruptcy.
People generally file for bankruptcy to get a fresh start. But if you are looking to restart or continue your sole proprietorship after receiving your Chapter 7 discharge, it will feel like starting from scratch. Some states allow you to protect certain business assets by claiming them as exempt tools of the trade. If there is no such exemption available in your state, enabling you to protect certain business assets from liquidation in the bankruptcy, business assets that have value will be sold by the trustee. This can include customer lists and the right to the business name, as well as any accounts receivable, inventory and equipment.
There is nothing in the bankruptcy law that prohibits you from starting a new business after bankruptcy, but it will likely be difficult to secure sufficient financing to buy inventory, equipment and supplies to replace those lost in the bankruptcy. You may also have to operate under a new name. Rather than create a new business as a sole proprietorship, you might want to take steps to distinguish the new business from yourself by creating a separate legal entity, like a corporation, to own and operate the business.