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

Chapter 7 ends businesses, and it ends them by design. The chapter has no plan, no debtor in possession, and no mechanism for an owner to keep operating while creditors wait, so a business kept as a going enterprise under its owner is not among its outcomes. Pieces of a business can survive. Five situations describe what can, and in each the thing that survives is smaller, or differently owned, than the owner hoped.

1. A Company's Own Chapter 7 Keeps the Doors Open Only for the Trustee

Once an LLC or corporation files Chapter 7, the United States Trustee appoints an interim trustee from its panel promptly once the case begins, and authority over the premises, the accounts, and the equipment passes to that person. Section 721 allows the court to authorize the trustee "to operate the business of the debtor for a limited period, if such operation is in the best interest of the estate and consistent with the orderly liquidation of the estate."

A limited period, for the estate. A trustee might keep a restaurant open long enough to sell perishable inventory at value, or keep a service contract running so that it can be sold with its customers attached. The operation survives for a few weeks. The owner's role in it ends on the petition date.

The company also receives no discharge, since Section 727(a)(1) grants one only to an individual. An LLC leaves Chapter 7 with its debts intact and its assets gone, which makes the filing a closing instrument.

2. The Assets Can Be Bought Back, at a Price the Trustee Must Defend

The trustee's first duty under Section 704(a)(1) is to collect and reduce estate property to money and to close the estate as expeditiously as the interests of the parties allow. Selling is how that happens, and under Section 363(b)(1) a sale outside the ordinary course requires notice and a hearing. Anyone may buy. That includes the former owner.

An owner who wants the ovens, the client list, the trade name, or the phone number back is a buyer like any other, and in one respect a less welcome one, since creditors reviewing the sale will ask whether the price reflects what the assets would bring from a stranger. The trustee has to be able to say that it does. Take a hypothetical print shop whose equipment is appraised at $60,000 and secured by a $45,000 equipment loan. A former owner offering $62,000, enough to pay the lien and leave $17,000 for the estate, has made a respectable bid. A competitor offering $70,000 has made a better one, and the trustee's duty runs to the better one.

Section 363(f) lets the trustee sell free and clear of liens in stated circumstances, among them the lienholder's consent, a price above the aggregate value of all liens, or a lien in bona fide dispute, and Section 363(k) lets a lienholder bid its claim in place of cash. The lender holding the equipment note may therefore be the owner's rival at the sale. Under Section 363(m), a good-faith purchaser keeps what it bought even if the sale order is later reversed, unless the sale was stayed pending appeal.

The source of the money matters as much as the price. Cash the owner moved out of the company in the months before the petition, then offers back as the purchase price, invites the trustee's attention under the avoidance provisions, and the purchase becomes an inquiry into the earlier transfer. Even clean money leaves a practical gap that owners tend to overlook: buying the assets of a closed company restores the equipment and none of the contracts, and a customer who was loyal to the old entity owes nothing to the new one.

3. A Sole Proprietor's Trade Continues Because the Person Continues

A sole proprietorship has no separate existence to liquidate. When its owner files Chapter 7, everything the business owns is the owner's property, and Section 541(a)(1) places all of it in the estate: the truck, the receivables, the inventory in the garage. The trustee sells what is not exempt.

But the proprietor is an individual, and an individual can receive the discharge an LLC cannot. Personal liability for most business debts, including funder claims on which the proprietor was liable, ends at discharge, subject to the exceptions in Section 523 for fraud, certain taxes, and the other listed categories. A lien on the truck does not end with it; the Supreme Court held in Johnson v. Home State Bank that a discharge extinguishes the personal action while leaving the claim against the collateral intact. The skill, the license, and the next customer stay with the person, and what the trade needs to restart is the subject of the next situation, which is smaller than the word "exemption" suggests.

4. Exempt Tools Leave With the Debtor

An individual debtor may exempt property under the federal list in Section 522(d) or under the state list, where state law permits the choice, and which state's law applies depends on where the debtor lived during the 730 days before filing. The federal list includes, at Section 522(d)(6), the debtor's interest "in any implements, professional books, or tools, of the trade," up to a dollar cap that is modest by the standards of any business with real equipment.

A barber's chairs may fit under it. A landscaper's fleet will not.

5. An Owner's Personal Chapter 7 Leaves the Company Outside the Case

An owner whose LLC is still trading may file Chapter 7 personally, most often because of personal guaranties signed for the company's debts. The company's accounts are not frozen by that filing, its creditors are not stayed from pursuing it, and its own obligations continue on their terms.

The company is not the debtor.

What enters the owner's estate is the owner's interest in the company. Section 541(a)(1) includes all of the debtor's legal and equitable interests, and Section 541(c)(1) brings them in notwithstanding a provision that restricts transfer or is triggered by bankruptcy (an operating agreement drafted to make the interest worthless to anyone but the member will not, on that account alone, keep it out of the estate). What a trustee may then do with a membership interest depends on the state LLC statute, the operating agreement, and the court.

The owner's discharge ends personal liability on the guaranties, subject to the Section 523 exceptions. It does nothing for the company. Under Section 524(e) a discharge leaves every other obligor on the same debt where it stood, so the funder that loses its claim against the owner keeps its claim against the LLC, and a company still remitting on a contract the owner can no longer be pursued on is a company the funder has every reason to press.

The debit arrives the next morning, on schedule.

Where Chapter 7 Is the Wrong Instrument

A business that has already closed, with equipment to sell and creditors to answer, may be exactly what Chapter 7 exists for, and its owner needs bankruptcy counsel rather than a negotiator. An owner who wants the business to keep operating needs a different instrument, whether a reorganization under Chapter 11 or 13 or an agreement reached outside court. Delancey Street works on the second kind: it is not a law firm and files no bankruptcy cases, its work is negotiating funder balances and similar business obligations, with outside attorneys, separately licensed, brought in when legal work is needed. Its initial review is free and confidential, and for an owner weighing a personal Chapter 7 because of guaranties on funder debt, the review can show whether those guaranties might be resolved while the company stays open.

Liquidation law has a narrow imagination. It sees assets, liens, and a line of claimants, and it arranges them well. What it cannot see is the part of a business that never appeared on the schedules, which is often the part an owner means when asking to keep it.