Can You Keep Your Business If You File for Chapter 7 Bankruptcy?

In some cases, you might not be able to continue operating your business when you file for Chapter 7 bankruptcy. There are some exceptions, however. Learn which type of businesses and business assets a bankruptcy trustee is likely to sell in a Chapter 7 case.

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.

How Chapter 7 Bankruptcy Works

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.

What Type of Business Do You Have?

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.

  • Sole proprietorships. If your business is not a partnership or incorporated, you’re operating a sole proprietorship. For example, if you're a carpenter, you might operate as “Elaine Watson, doing business as Watson’s Cabinet Shop.” As a sole proprietor, you own the equipment you use in the business, the inventory, the accounts receivable and all other assets the business uses. In a Chapter 7 bankruptcy, there is no difference between your assets and debts, and those of the company.
  • Corporations and limited liability companies. If your business is incorporated (it’s an Inc., LLC, PLLC, or similar), the company is a separate entity from you. The company owns the equipment, inventory, and accounts receivable. Instead of owning all the assets personally, you own stock or shares. The property that the trustee can potentially sell will be the shares or stock (or, if you’re the sole shareholder, essentially the entire company).
  • Partnerships. Partnerships are somewhat tricky, because like a sole proprietorship, partners are personally liable for the debts of the business, and therefore, the debts will be included in your personal bankruptcy. Because a bankruptcy could absolve you of your responsibility to pay much of the business debt, many partnership agreements have clauses that dissolve the partnership if one of the partners files for bankruptcy. Litigation arising from a partner filing for bankruptcy is fairly common so be sure to consult with a bankruptcy attorney.

For a comprehensive evaluation your business in a Chapter 7 bankruptcy, you should consult with a bankruptcy attorney before filing.

Business Asset Exemptions

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.

Selling the Business or Business Assets

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.

  • Can the stock be sold? Some stocks are freely traded, but others have transfer restrictions. For instance, a closely-held family corporation might allow only family members to own the stock.
  • Is it a personal services business? Businesses like mobile window repair services or personal training that depend primarily or solely on personal services provided by the debtor usually have little that a trustee can sell.
  • How much effort will it take to sell the business or the assets? The longer the business will take to sell, the more it will cost the trustee to maintain the property.
  • Will the trustee have to run the business while it’s for sale? A trustee can keep a business going with permission of the bankruptcy court if that will maximize the value for the creditors. Sometimes, the trustee will keep a business running to liquidate inventory.
  • Can the debtor buy back the business from the trustee? Perhaps the debtor can obtain a loan or substitute exempt property.

Chapter 13 Bankruptcy

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.

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