What Happens to Business Assets in Chapter 7 Bankruptcy?

If you are a sole proprietor, find out what happens to your business assets in Chapter 7 bankruptcy.

If you are a small business owner, you are probably concerned about what will happen to your business assets when you file for Chapter 7 bankruptcy. If you run your business as a sole proprietor and not a corporation or limited liability company, the business assets legally belong to you, just like the furniture in your house. Unfortunately, the business debts also belong to you.

Just like with your personal assets and debts, you must list all of your business debts and assets on your bankruptcy papers. Whether you can keep your business assets or not depends on whether they are exempt.

Non-Exempt Business Assets

Chapter 7 is a liquidation. In exchange for the discharge of most or all of your debts, the bankruptcy trustee sells your nonexempt property and uses the proceeds to repay creditors. Any business assets of value that you cannot claim as exempt will be sold by the trustee.

Claiming Business Assets as Exempt

Each state exempts certain property, often up to a certain value. Some states allow you to use the federal bankruptcy exemptions instead of your state exemptions. If a business asset falls within an applicable exemption, you can claim it as exempt and keep the property.

Some common types of exemptions that you might be able to use to protect business assets include:

Tools of the trade.  If you work in a trade that requires specialized tools, the federal bankruptcy exemptions and some state laws allow you to claim tools of your trade as exempt. Under the federal exemptions, you are allowed to claim $2,175 in tools of your trade or professional books as exempt. This might not seem like much, but if your tools are well used, the resale value is probably lower than you think. An appraisal before you file will give you a good idea of their value and provide you with proof that you are entitled to the amount you are claiming as exempt. Some states have a tools of the trade exemption that is much higher than the federal exemption amount.

Wildcard exemption.  Many states have a wildcard exemption which allows you to protect equity in various types of property. You might be able to apply the wildcard exemption to business assets.

(To learn more about how exemptions work, and what types of property your state exempts, and in what amounts, see our Bankruptcy Exemptions area.)

More Information for Small Business Owners

If you're a small business owner and your struggling with debt, Nolo has the information you need. See our section on Bankruptcy for Small Business Owners for lot's of free information. For in-depth help, see Nolo's Book, Bankruptcy for Small Business Owners, by Bethany K. Laurence and Stephen Elias.

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