Nothing in the law says that a business owner can’t file a bankruptcy case. But the real question is whether you’ll still own that business after it’s over. The answer? It depends. Factors, such as how you organized the company, what it does, and whether you can exempt (protect) your ownership interest, will determine its fate.
To know what will happen to the company overall, you’ll start by looking at its formation.
Two factors will likely determine whether you’ll lose your business—the value you can protect and whether the company is dependant on your skills.
You can protect some of the property that you own from the reach of the bankruptcy court and your creditors using the property exemptions allowed by your state. In most states, there's no specific exemption for corporate stock; however, you might be able to use a wildcard exemption that allows you to protect any property of your choosing. Not all states have a wildcard exemption, however.
You might be able to protect a portion of the company’s assets as “tools of the trade,” if that exemption category is available. This exemption covers a certain amount of property that you need in your trade or profession.
In every Chapter 7 case, a bankruptcy trustee appointed by the court will carry out a duty to liquidate the assets that you can’t exempt, then distribute the proceeds to your creditors who file valid claims. Sometimes an asset isn’t exempt, but its value is so small that liquidating it would be a burden.
Another business may lose its value if you aren’t associated with it any longer. In general, the trustee won’t have much interest in a sole proprietorship except for the assets that can be sold. If the business is incorporated, the trustee will be more interested in selling the stock if the company’s value doesn’t depend on your continued involvement.
Example 1. You own an unincorporated business called Frank's’ Fine Furniture. You're a carpenter who builds custom furniture. You own your tools, a small wood shop, a pickup truck, and the materials from which you craft your custom pieces. Your tools are exempt, but the rest of the business assets are not. Because it’s a sole proprietorship, the trustee can’t sell your interest in the company, but he can liquidate the nonexempt assets.
Example 2. Frank’s Fine Furniture is incorporated. You own 100% of the stock, and you estimate that the company has assets worth about $20,000. But, without you designing and building the furniture, Frank’s Fine Furniture has no additional value. The trustee can sell the stock; however, the value of the business won’t include your expertise, and will likely be worth $20,000.
Example 3. Frank’s Fine Furniture is incorporated. You own 100% of the stock. The company has 25 employees, hard assets, like machinery, real property, and vehicles, worth $10,000,000, and annual revenues of $3,000,000. You no longer design or craft the furniture yourself. The trustee will sell your interest in the company (the stock) at full value because it no longer depends on your talents or good name.
When you own your own business, filing for bankruptcy is even more complicated than usual. Not only do you need to understand what will happen to your company, but you’ll likely have to provide financial information for you and the company. To ensure you’re doing what’s best, consult with a bankruptcy attorney who will help you evaluate what you stand to lose, as well as discuss any alternatives available.