If you want to file for bankruptcy but keep your business, Chapter 7 bankruptcy is probably not a good option. While it may depend on what your business is and how it is conducted, in most instances, you will not be able to operate your business after you file for a Chapter 7 Bankruptcy.
(To learn more about filing Chapter 7 bankruptcy for your small business, see our Chapter 7 Bankruptcy for Small Businesses area.)
Nonexempt Assets Must Be Sold
When you file for Chapter 7 bankruptcy, a bankruptcy trustee is appointed to liquidate or sell all of your non-exempt assets that have value and use the money to pay your creditors. If you are a sole proprietor, the assets that the Trustee will be looking to sell will include any of your business assets. The law may provide exemptions for certain of the business assets, meaning you would be allowed to keep those assets, but the exemptions for business assets are limited.
In all likelihood, you will be turning over business assets to the trustee. This would also include any accounts receivable, which would leave you short when it comes to operating capital necessary to keep the business going.
Buying Back Your Business Assets
There are times when you can arrange to use exempt funds or have friends or family loan you money to buy back the business assets. This is risky though. Most trustees sell assets by auction. You would need to be the high bidder and, if you are borrowing money, you may be getting yourself in financial trouble all over again.
Also most small businesses thrive on personal and prompt attention. Even if you are successful in repurchasing the non-exempt business assets, it will take time to accomplish this and your customers may have moved on.
An Exception: Personal Service Business With No Assets or Inventory
There may be an exception to this general rule if your business is a personal service business with no inventory and do not use valuable tools or other assets that the trustee will need to sell. A private tutor, a piano teacher that gives lessons in the students' houses, or a consultant may be able to continue their business without a problem.
Corporations and Limited Liability Companies
If you operate your business as a corporation or a limited liability company, the trustee may not have immediate access to the assets but will be the owner of the stock or the beneficial owner of your membership interest. Depending on what will produce the highest value, the trustee can:
- obtain court permission to operate the business so it can be sold as a going concern
- liquidate the business (paying all the business debts first)
- sell the ownership interest, or
- abandon it.
Under any of the first three options, you would not be keeping the business unless you buy it back from the trustee. Abandonment would put the business back in your hands, but is not likely if the business has value. The trustee only abandons assets that have no value to the bankruptcy estate.