Chapter 7 Can . . . Help You Close Your Business But Keep Business Assets
Protect your business assets right away with the “automatic stay,” and then permanently with property exemptions.
Often, by the time you are ready to file a personal bankruptcy, your business has no meaningful assets that you could sell. That simplifies your situation because then you don’t need to worry about how to protect those assets. And you’d don’t have the headache of deciding how to liquidate them to pay the business’ creditors.
But even if your business DOES have some assets, as long as that business is a sole proprietorship, filing a personal Chapter 7 case often provides you a sensible way to deal with those remaining business assets. You may be able to keep those assets if you need them. Or if don’t need them your Chapter 7 trustee can sell them and pay some of your most important creditors.
This blog post covers hanging onto business assets. The next one covers when the trustee uses your business assets to pay your creditors.
Protection from the “Automatic Stay”
You may want to keep business assets which you need to use to generate income after your bankruptcy. You may need them as an employee or if you intend to be self-employed.
As long as your business was in the form of a sole proprietorship, your personal bankruptcy filing will immediately protect your business assets. This protection is called the “automatic stay.” (It also protects your personal assets.) The “automatic stay” protects those assets from creditor collection actions, such as lawsuits, judgment liens, garnishment, foreclosure, and repossession.
The assets of your business are legally treated as your own assets. So, the “automatic stay” protection of your assets extends to your business assets.
As for secured debts related to the business—secured by collateral like your business vehicle or equipment, for example—the “automatic stay” also prevents the secured creditors from repossessing any collateral, at least temporarily. That gives time for you and your attorney to offer that you “reaffirm” the debt. Reaffirmation is your consent to remain personally liable on a debt so that you can keep the collateral.
Property “Exemptions” Protecting Business Assets
The Chapter 7 trustee will want to know about your “free and clear” business assets. However, you will be able to keep such assets to the extent they are covered by your personal “exemptions.”
A property exemption is a state or federal law that allows you to shelter an asset from your creditors. Exemptions also protect your business assets from the Chapter 7 bankruptcy trustee because he or she acts on behalf of your creditors.
Exemption laws can be quite complicated, and differ from state to state, often tremendously. In some states you must use that state’s system of exemptions, while in other states you have a choice of using either the state’s exemptions or a set of federal exemptions in the Bankruptcy Code. Also, you have to live in a state for a certain length of time before you can use the exemptions available to the residents of that state. So there’s much more to exemptions than may seem at first glance.
Examples of Business Property “Exemptions”
Most states an exemption specifically for tools of trade or business equipment, which generally covers just about anything used for earning a living, up to a certain dollar value. One example of this is the following statute from Oregon exempting:
The tools, implements, apparatus, team, harness or library, necessary to enable the judgment debtor to carry on the trade, occupation or profession by which the judgment debtor habitually earns a living, to the value of $5,000.
See ORS 18.345(1)(c). This $5,000 amount can be doubled in a joint bankruptcy filing by a married couple as long as the business property is jointly owned by them.
There are also pooled exemptions which can include any of various kinds of property including tools of trade, up to a certain dollar amount. An example is from Texas, which provides an exemption of $60,000 for a family, or $30,000 for a single person, covering a pool of personal property including, among other categories:
(3) farming and ranching vehicles and implements;
(4) tools, equipment, books and apparatus, including boats and motor vehicles used in a trade or profession…
These two examples show some of the wide diversity among the exemptions potentially available for your business assets. Talk with your bankruptcy attorney what exemptions would be available to your business assets that you want to keep.