Filing Chapter 7 Bankruptcy and Small-Business Owners

BankruptcyChapter 7 bankruptcy is a great way to eliminate debt.  Debtors list their assets, protect their assets using the exemptions available to them in the state in which they live, and then receive a discharge.  In Texas, we have very good exemptions.  Most people who file Chapter 7 bankruptcy do not have nonexempt property, which means they get to keep all of their property at the end of their Chapter 7 case.

However, if you own a small business, then liquidation of assets in a Chapter 7 case may mean that the business cannot continue operating.  It depends largely on how the business is valued.  The first thing I generally want to know is whether the business is incorporated or is a partnership or sole proprietorship.  If the business is incorporated then the debtor owns stock in the business that must be valued.  Second, I want to know if the business has any equipment, inventory, or accounts receivables.  These things can greatly increase the value of a business.

Assigning a value to a business in a Chapter 7 case largely depends on whether or not the business has property that can be liquidated.  If the business is a service oriented business without equipment or inventory, such as an attorney, accountant, property inspector, then the business may not have much value to the trustee.  The main value in these types of businesses is the debtor’s expertise and skill in performing their service.  However, if the business has property that cannot be exempted and is easily liquidated, then filing Chapter 7 bankruptcy may mean the end of the business.

Trustees will let debtors purchase property back from the estate in order to continue operating the business, but the purchase must be made using exempt funds or money that comes from a third party.  Most debtors in Chapter 7 cases do not have money or credit to make these types of purchases.  If the goal is to continue operating the business then Chapter 11 may be a better option.