If you’re a business owner, filing a personal Chapter 7 bankruptcy could put it in jeopardy. It all depends on how you’ve structured your business and whether it has value that could be used to pay your creditors' claims.
In a Chapter 7 case, you’re allowed to designate some of your property as exempt or protected so that after the case is over you’ll have enough assets for a fresh start. The exemptions are usually defined by the state where the debtor resides or where the business assets are located. In some states, you can choose between the state exemptions and a list within the bankruptcy code itself (federal exemptions).
In exchange for forgiveness (discharge) of most or all of your debts, you’re required to turn over all of your nonexempt property to a court-appointed trustee (the official who manages your case), who will sell it and use the proceeds to pay your creditors.
Whether you keep your business in a Chapter 7 bankruptcy will likely depend on its legal status. The structure of the business is one of the factors that determine whether the trustee will be able to sell the actual business, the business assets, or the corporate stock that you own.
For a comprehensive evaluation your business in a Chapter 7 bankruptcy, you should consult with a bankruptcy attorney before filing.
Unfortunately for most business owners, there aren’t many exemptions that could cover either the stock in a corporation or any business assets. Many states have some limited exemptions that could be used to cover “tools of the trade,” which are usually personal assets used by an individual to carry on a trade or profession. Think of a mechanic's tools, a work truck, or a lawyer's library of law books.
A small number of states have exemptions that could cover some specific business assets, and many cover certain types of property owned by a partnership. The federal bankruptcy exemptions and some states have a category of exemption commonly called the “wildcard,” which can be applied to any property, but the value is usually limited to a few thousand dollars.
You’ll need to consider what will happen to the assets that you can’t protect. The trustee has two choices in dealing with a nonexempt asset: sell it or abandon it.
Before selling an asset, the Chapter 7 trustee will decide whether selling will bring in enough money to benefit the creditors. If the trustee can’t realize enough money to make it worthwhile, the business will be considered “burdensome to the bankruptcy estate,” and abandoned back to the debtor.
Here are some of the issues the trustee will consider.
If you’d like to stay in business, you might have a better chance doing so if you qualify to file for Chapter 13 bankruptcy. If the business has value or assets that you can’t exempt, you can pay that value to your creditors over a Chapter 13 three to five-year repayment plan.
To learn more, see Chapter 13 Bankruptcy for Small Businesses: An Overview.