• When a sole proprietorship needs bankruptcy relief, the owner must file personal bankruptcy.you broke my heart image by Elena kouptsova-vasic from Fotolia.com
  
  The law does not separate a business and the business owner when he is the sole owner of the business. For that reason, when the business goes under and action needs to be taken, the business owner must file for personal bankruptcy. Individual debtors may either file for Chapter 7 or Chapter 13 bankruptcy. The following bankruptcy rules apply to a California sole proprietor.
  
  

Means Test

• To file for Chapter 7 bankruptcy, a debtor must pass the means test. The debtor compares his family income to the median family income for the state of California. As of 2010, the Census Bureau listed California's median incomes as $47,969 for a single earner; $64,647 for a family of two; $70,638 for a family of three; and $79,174 for a family of four. Add $7,500 for each family member in excess of four.
  
  If his family income ranks below the state median, he can file for Chapter 7. If the debtor's family income is above the state median, he must calculate his monthly disposable income by subtracting his allowed monthly expenses from his monthly income. If his monthly disposable income is less than $100, he can file for Chapter 7. If the debtor's monthly disposable income is more than $100, but that amount would not pay at least 25 percent of his debts over the next 60 months, he can file for Chapter 7.
  
  

Bankruptcy

• If the debtor fails the means test, he may need to file for Chapter 13 bankruptcy. In a Chapter 13 case, the debtor must propose a repayment plan under which he will repay his debts. The repayment plan lasts for three years if the debtor's median income is below the state median and for five years if the debtor's median income is above the state median. A bankruptcy trustee will be appointed. The debtor will make monthly plan payments to this trustee, and the trustee will, in turn, distribute payment to each of the debtor's creditors.
  
  In a Chapter 7 case after a debtor has filed his bankruptcy petition, a bankruptcy trustee will take the debtor's property as property of the bankruptcy estate. The property will be sold, and the proceeds will be used to repay creditors. Certain property owned by the debtor cannot be sold.
  
  

Exemptions

• The following property that California law allows its debtors to exempt may be important to sole proprietors: homesteads up to a certain amount; clothing; furniture; appliances; health aids; bank deposits from the Social Security Administration; tools, implements, books, uniforms, instruments, one commercial vehicle, equipment and furnishings up to $6,750 or $13,475 if used by both spouses in the same occupation; a commercial vehicle up to $4,850 or $9,700 if use by both spouses in the same occupation; wages; insurance; public benefits; pensions; and business or professional licenses. Refer to California law for a complete list.