Can You Keep Your Business in Chapter 7? 5 Situations Where Some of It Survives

If there is no equity in your business, the trustee will probably not touch it. If there is equity, then the trustee may try to sell the business. The two factors that will decide whether the company stays open are whether it has liability insurance and whether the trustee will sell the business property or the business itself.

The trustee holds your property in trust, and that includes a business. They don’t want to get into a lawsuit, so the trustee will ask for proof of liability insurance. Having insurance is not the only factor in whether the trustee will shut down a business. Sometimes, the trustee worries that valuable property or stock might walk off before they can inventory it, so they’ll shut down the business while they take stock. Or, if it seems as though there’s nothing to sell, the trustee will probably leave the business alone.

The rules for what a trustee can sell in bankruptcy for business assets are the same as for personal assets in Chapter 7. Your exempt property stays with you, and the trustee sells unprotected assets to pay creditors. If you are a sole proprietor, you personally own everything connected to your business, and the assets are at risk in your bankruptcy. If you’re the owner of an LLC or corporation, on the other hand, you may only own shares or an interest in the company. You are only bankrupt personally; the company itself is not in bankruptcy.

Protect Your Business

The first situation that survives is when you’re a sole proprietor running a service business like a small law office, accounting firm, or freelance writing business. When you’re in a service profession, the trustee can’t sell your efforts; you’re still the same you. Because service businesses don’t usually have a product that the trustee can sell, businesses like this are less likely to be closed. However, you should check to see if you need to exempt tools and equipment you need to do your job, as well as office furniture and accounts receivable. If you don’t exempt these, the trustee may sell them.

The second situation that survives is when you own 100% of an LLC or a corporation that nobody would buy. This kind of company relies on the labor of one person, and the shares of the company are valuable only when you personally continue to work for the company. If you’re in an LLC or corporation, it owns all the equipment and receivables, not you. In this case, there’s no specific exemption for the shares of an LLC or corporation, so if they’re not worth anything, then they may not matter in your bankruptcy. What the trustee is looking for is any ownership interest that sells for real money. If your company has so few assets that nobody will pay for a share, or has so much debt that nobody would pay to get out of that debt, then your company is probably safe from the trustee selling your shares. Your trustee might abandon the company shares, which means they aren’t part of your estate, and you get to keep them.

The third situation that survives is when you own part of an LLC or a corporation that is not in bankruptcy and nobody wants to buy. When you own only a partial stake in a company, the business is even harder to sell than when you own it all. It’s hard to sell a business share if the other owners are family members. Many investors shy away from taking on family members as co-owners.

Fourth, business property and assets may be exempt. There’s a federal exemption for up to $3,175 of tools you need for work. However, many states no longer use the federal bankruptcy exemptions. Your state chooses whether you can use its exemptions, or whether you can use federal ones. Federal exemptions tend to be higher than state exemptions, and many states do not have their own exemptions for business-related assets.

Fifth, you can often keep non-exempt property if you pay the bankruptcy trustee what a sale would net your creditors. You would usually have to pay the property’s value minus your exemption for the property and sale costs. It’s up to the trustee whether to accept your offer.

You Lose the Company

If you are the sole proprietor of a business that sells products, you probably won’t be able to keep the business because the trustee will close it to inventory the product, equipment, furniture and books, even if it’s all exempt.

If the business is one that a trustee could sell to a willing buyer, for example an LLC or corporation where you own stock worth a lot of money, the trustee will probably sell the shares. Say your trustee will sell your 100% ownership of a business for $50,000. You have the wildcard exemption to protect $5,000. The trustee will sell the company for $50,000, return your $5,000, and use $45,000 to pay creditors, minus the cost of the sale. You lose the company.

If your business is a partnership, one partner may file for bankruptcy, and the others don’t have to. However, the bankruptcy of one partner can affect the liability of the other partners. Some states offer protection for this situation, but it can depend on the agreements made within the partnership, which often state that the company will dissolve if a partner declares bankruptcy. Bankruptcy can be very complicated for partnerships, so you should talk to a lawyer who specializes in business bankruptcies first.

Consider Filing for Chapter 13 Bankruptcy Instead

If you’re worried you’d lose your company by filing for Chapter 7 bankruptcy, consider filing for Chapter 13 bankruptcy instead. In a Chapter 13, the trustee doesn’t try to sell your property, including your business assets. However, an LLC or corporation can’t file for Chapter 13 bankruptcy; only individuals can. If you’re already in Chapter 7, you have a one-time right to change your bankruptcy to a Chapter 13. You can only do this if your case hasn’t been converted to another chapter before, and you qualify for the $526,700 limit on unsecured debt to file for Chapter 13.