Can You Keep Your Business If You File for Chapter 7 Bankruptcy? (2024)

If you're a business owner, keeping your business by filing for Chapter 7 bankruptcy might be possible if the company isn't worth much. Typically, a debtor with a valuable business interest wouldn't file for Chapter 7 bankruptcy because of the high likelihood of it being sold for the benefit of creditors. Find out how to determine whether you'd lose a business in Chapter 7 and other bankruptcy options, such as filing a personal Chapter 13 or putting the business in Chapter 11.

What Happens to My Business If I File Chapter 7?

Chapter 7 is a "liquidation" bankruptcy that allows filers to keep some but not all property. Assets that can be protected or "exempted" are primarily things needed to maintain a household and employment and usually don't include a high-value, profit-generating business.

That's not to say your business won't survive your personal Chapter 7 filing. But unless you can exempt the company's value, the Chapter 7 trustee will sell the business, and you'll lose it.

Can a Business File for Chapter 7 Bankruptcy and Stay Open?

Generally, no, not if the business itself is placed in Chapter 7 because a company isn't entitled to protect itself or its assets with exemptions. Essentially, the Chapter 7 trustee sells the business assets and pays the proceeds to creditors, thereby shutting down the company.

However, an exception exists. Sometimes sole proprietorships can survive Chapter 7, in part because sole proprietors can protect businesses using exemptions (more below).

How Personal Chapter 7 Bankruptcy Works

Chapter 7 bankruptcy is the quickest chapter to file. Filers don't repay creditors, and qualifying debts are erased after approximately four months. Filers can keep property that is exempt from bankruptcy but lose nonexempt property.

Exemptions typically cover clothing, household furnishings, a modest vehicle, some equity in a residence, and a retirement account—things individuals need for a fresh start after bankruptcy. Learn more about keeping property in Chapter 7 bankruptcy.

Exemptions That Protect Business Interests in Bankruptcy

Exempting the value of your company or its assets is the key to keeping it in Chapter 7 bankruptcy. Unfortunately, most states don't provide particular exemptions for businesses. When they do, they typically don't amount to much—the exception being states with significant farming industries.

That's not to say you can't protect your business, and although it might be difficult to protect everything you need, it will be possible for some business owners. For instance, many states let filers protect "tools of the trade," usually personal assets an individual uses to carry on a trade or profession. Think of mechanic's tools, a work truck, or a lawyer's library of law books.

A wildcard exemption—an exemption that lets a filer protect any item of the filer's choosing—works well for assets that aren't covered explicitly by exemptions, such as corporate shares. The value is usually limited to a few thousand dollars, but not always.

Where to Find Bankruptcy Exemptions

Your state decides the property filers can keep, and most filers will use state bankruptcy exemptions. However, some states allow filers to use federal bankruptcy exemptions instead, which can be beneficial because the federal exemptions offer a sizeable wildcard exemption. Click the links to find exemptions online.

Protecting Your Business When Filing a Personal Chapter 7 Bankruptcy

To determine whether you can protect your business in a personal Chapter 7, you'll examine your business type, ownership interest, and available exemptions. Depending on the business and its value, you'll need to protect either:

• the business itself
• business ownership interests, such as company shares, or
• equipment, products, and other assets necessary for business operations.

What Type of Business Do You Own?

The business structure will help you determine what you must protect to prevent the company from being sold in Chapter 7.

• Sole proprietorship. You're operating a sole proprietorship if your business is not a partnership or incorporated. 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. In Chapter 7, there's no difference between business and personal assets and debts of a sole proprietor. They're all treated as yours.
• Corporation or limited liability company. If your business is incorporated (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.
• Partnership. Partnerships are somewhat tricky and aren't usually involved in bankruptcy. Like a sole proprietorship, partners are personally liable for the business's debts, which will be included in your personal bankruptcy. Additionally, because of partner liability, trustee bankruptcy litigation against other partners to recover money for business debts is relatively standard. Many partnership agreements have clauses that dissolve the partnership if one of the partners files for bankruptcy. This article doesn't address partnerships further due to the complexity and relative rarety of partnerships in bankruptcy.

How a Personal Bankruptcy Affects a Sole Proprietorship

If you're a sole proprietor, your ownership interest will likely be the value of the business if sold or the business assets if they're worth more. A sole proprietor can use available exemptions to protect business property, including equipment, products, accounts receivables, customer lists, and more.

A trustee cannot sell your future services, so you'll be in the clear if your business is based solely on your labor. If you have this type of business, you won't need to worry about losing it.

Example. Jacob owned his all-natural yogurt shop as a sole proprietor. When fresh fruit costs skyrocketed, he could not pay his bills and tried selling the shop. When unsuccessful, he filed for Chapter 7 bankruptcy. The Chapter 7 trustee couldn't find a buyer for the shop and auctioned off the equipment and furnishings Jacob owned outright, and the leased equipment was returned per contract. Jacob was able to erase or "discharge" the strip center lease, all outstanding vendor balances, his maxed-out credit cards, and other qualifying debt.

Example. Lorainne owned an art appraisal business as a sole proprietor. After her Chapter 7 bankruptcy, she continued working as usual. The trustee couldn't sell the business because all revenue was generated through Lorainne's labor.

Personal Bankruptcy and an LLC or Corporation

In an LLC, you must be able to protect the value of the percentage you own, which could be 100% if you're the only member. If the business is a corporation, you must exempt your shares (again, 100% of the shares must be protected if you're the sole shareholder). You'll use exemptions to cover your ownership interest only, not the property owned by the business.

Will the Trustee Sell the Business or Business Assets in Chapter 7?

You'll want to consider what will happen to the assets you can't protect. The trustee has two choices in dealing with a nonexempt asset: sell or abandon it.

Before selling an asset, the Chapter 7 trustee will decide whether selling will bring enough money to benefit the creditors. Suppose the trustee can't realize enough money to make it worthwhile. In that case, the business or asset 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.
• Is it a family-owned and operated business? Even if the interest can be sold, few buyers will be eager to purchase it.
• Is it a personal services business? Businesses like mobile window repair services or personal training that depend solely on personal services can't be sold.
• How much effort will it take to sell the business or the assets? The longer the company takes to sell, the more the trustee will have to spend managing the business.
• Will the trustee have to run the business while it's for sale? A trustee can keep a business going with the bankruptcy court's permission if that maximizes the creditors' value. 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.

Protecting a Business Using Bankruptcy Chapters 11 and 13

If you'd like to stay in business, you might fare better filing for Chapter 11 or Chapter 13. Both are reorganization bankruptcy chapters that allow the filer to keep assets, including businesses, and lighten debt obligations by reducing balances owed and restructuring payment requirements.

Businesses and individuals can file for Chapter 11. However, only individuals and sole proprietors qualify for Chapter 13. To learn how an individual Chapter 13 might help you retain a business, read Chapter 13 Bankruptcy for Small Businesses: An Overview.

Consult a Business Bankruptcy Lawyer

The outcome of a bankruptcy case depends on the particular factors involved. Use this information for general knowledge purposes only. For a comprehensive evaluation of your Chapter 7 case, consult a bankruptcy attorney before filing.

Need More Bankruptcy Help?

Did you know Nolo has made the law easy for over fifty years? It's true, and we want to ensure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.