Filing a personal bankruptcy case is a complicated experience, but you can still keep your business doors open. Since it involves a lot of paperwork and presents tough questions, you should understand what you are getting yourself into. The section below discusses in-depth the effect of filing personal bankruptcy on your business.

Will You Keep Your Business Doors Open If You Bring a Chapter 7 Case?

If you are a business owner and file a personal Chapter 7, you can keep the business. You can designate some of your assets, so you have the necessary things for a fresh start after your case is closed. In return for the discharge (forgiveness) of your assets, you should turn over non-exempt property to a trustee. The trustee will sell your property and use these proceeds to pay the creditors.

However, that might jeopardize your company. You will lose your business if the bankruptcy trustee could sell either your company, ownership interest, or critical assets required to run your business.

Chapter 7 Eligibility

Although debtors have to satisfy financial criteria to qualify for Chapter 7 bankruptcy, business people who have debts due to business operations do not have to.

Nonetheless, if most of the debt is not from the business, you should satisfy the Chapter 7 financial eligibility criteria. In this case, to determine whether you can bring Chapter 7, you measure your six-month income against California's median income for your family size. The current median household income is seventy-five thousand two hundred and thirty-five dollars. If your income is below the median household income, you qualify.

Protecting Your Company With Bankruptcy Exemptions

Exempting the firm and its property is essential in keeping it in the bankruptcy chapter in question. Depending on your business, you can protect either:

  • Your business
  • Business ownership interests like company shares
  • Equipment, property, and products critical for business operation

While you might have challenges protecting everything you require, it can be a reality for some business owners. Typically, exemptions include clothing, equity in your home, retirement account, motor vehicle, jewelry, and household furnishings.

Some states let bankruptcy filers select between federal and state bankruptcy exemption laws. California is not one of them, and you should use state exemptions. The state has two state exemption systems, and you can choose the exemption that works for you.

Typically, System 1 (704 exemptions) is best for filers with significant home equity. On the other hand, 703 exemptions or System 2 works for individuals who want to use a wildcard exemption to protect other forms of property.

How to Use a Wildcard Exemption

The wildcard exemption is a blend of the bankruptcy exemptions outlined in California Civil Code 703.140(b)(5) and b (1) or the collection of the lender's interest in personal or real property. Currently, the wildcard total is thirty thousand eight hundred and twenty-five dollars. The amount is adjusted after every three (3) years.

The exemption includes specific exemption amounts for cars, tools of the trade such as professional books and trucks, household goods, jewelry, and a cash surrender value of a whole life insurance contract. You can add the wildcard amount to any of the exemption amounts to keep a specific property, including:

  • Cash
  • Stocks and bonds
  • Jewelry
  • Art
  • Equity in motor vehicles
  • Tax refunds

Your bankruptcy lawyer should be able to assist you in determining what other property might qualify for exemption and how to apportion the exemption amounts. With legal assistance, it is possible to file personal Chapter 7 without losing your business.

Your Business' Structure

Your company's structure will assist you in determining what you will require to protect to avoid losing your company.

  1. Sole Proprietorship

A sole proprietorship is a one-owner company that has not been structured or incorporated as a limited liability company. From a legal perspective, there is no separation between the business and the owner. If you owe debts, your business creditors can sue you and cease your personal property to meet the judgment.

If a company is a sole proprietorship, a bankruptcy trustee might insist that the business owner closes the business until they assess its value, sales process of business property in the bankruptcy estate, and exempt status. Generally, the assessment takes months to complete.

Additionally, closing a business prevents you from incurring additional liability during the bankruptcy, whether:

  • for regular business loans, you may take in during your case, or
  • for legal lawsuits against the business.

Companies that run without property like consultants, freelancers, and service providers could be permitted to stay open. It is especially true if the chances of incurring legal liability or borrowing are minimal.

However, not all small businesses could be closed if they have considerable balance dues that the bankruptcy trustee can collect. For instance, if you're a realtor and expect to be paid commissions at the end of the month, the trustee could count the commissions in the bankruptcy estate once you are paid. Additionally, all proceeds your business generates during bankruptcy are part of the bankruptcy estate.

  1. Multi-Member Limited Liability Companies (LLCs) and Partnerships

If the company has at least one owner (is a multi-member LLC or partnership), your share will be in the bankruptcy estate. If you're the majority shareholder, the law makes it illegal for the trustee to interfere with the company or take its property.

A bankruptcy trustee or business creditor can acquire a charging order against the interest of a debtor-owner in the firm. The charging order serves as a lien against the company's interests. It allows the trustee or lender to get proceeds that would be given to the business owner.

Nevertheless, the charging order might not work for the trustee or creditor if the partnership does not regularly distribute proceeds to the members. The bankruptcy trustee only takes over the economic rights to receive profits from the business. Typically, an individual allocated economic rights can neither:

  • vote in or manage an LLC or partner nor
  • assume other members' rights available to business owners per the business operating agreement.

In other words, the trustee could sell or assign your economic right in the ownership interests to another person. They can't sell or transfer your business' share.

If you are a member of a limited liability company or a partnership, it is advisable to sign a buy-sell agreement before bringing a bankruptcy case. The agreement terminates the ownership interests. Violating this provision could result in legal action from the co-owners. Your bankruptcy can assist you in assessing your available options and responsibilities.

Single Member Limited Liability Companies and Corporations

The bankruptcy estate also includes your LLC membership and corporate shares. Suppose you're the major shareholder of the LLC or corporation. In that case, the trustee could assume control of your membership interests or shares and vote to liquidate or sell your business and then distribute all the profits to your lenders.

When determining whether to close the LLC or single-member corporation, the bankruptcy trustee will use the cost/benefit method. They will consider how much it will take to close and liquidate the company, the proceeds after selling the property, and whether there are exempt assets. More often than not, companies owe almost what they own. Therefore, liquidating the firm is not financially sensible. However, if your company has a reasonable debt amount and treasured non-exempt property, the trustee can dissolve your business and sell the property.

If a debtor owns a corporation with other members, their personal bankruptcy might or might not affect the business. For instance, if you have and run a corporation equally with other shareholders, you can file Chapter 7 without consequences.

Although the bankruptcy trustee is entitled to vote shares in the corporation, they cannot

  • call any meeting or
  • even force the corporation's dissolution to acquire its property

unless you own the most shares.

While the stock is counted in the bankruptcy estate, it will not be valuable to the trustee unless any other business owners intend to purchase it.

Selling Your Business or its Property in Bankruptcy Chapter 7

You will be required to reflect on what will occur to the business property that you cannot protect. Your trustee can choose to either sell or abandon the non-exempt asset.

Before selling your asset, the trustee will determine whether selling it will be beneficial to your creditor. If your business cannot bring in adequate money, the trustee will deem the asset or business taxing to the estate and abandon it back to you.

Factors the bankruptcy trustee will put into account include:

  • Can your stocks be sold? While some stocks are easily traded, others have transfer limitations.
  • Is your business a service business? A company that depends mainly on personal services offered by a debtor like personal training or plumber has little that the bankruptcy trustee could sell.
  • The amount of effort it will take selling your business or business property — The longer your trustee will take selling your company, the more it'll cost them to maintain the asset.
  • Can you purchase back your company from the bankruptcy trustee?
  • Will the bankruptcy trustee be required to operate your business while it is for sale? The trustee could keep your business with the bankruptcy court's permission, provided it will maximize your creditors' value. At times your trustee could keep the company operating to sell inventory.

The Impact of Filing Chapter 13 on Your Business

Filing Chapter 13 bankruptcy allows the debtor to keep the property while reorganizing and repaying a part or all their debts. Thanks to a repayment plan that lasts between three and five years. The filler can make monthly payments to your bankruptcy trustee, who will pay the lenders according to the plan.

The amount you pay depends on your expenses, the type of your debts, and your income. The higher the income, the higher the monthly payments you should pay. However, you should pay specific debts fully through the repayment plan irrespective of your income.

If you cannot show that you've adequate income to pay the debts in full, you might not reorganize via Chapter 13.

All remaining balances of eligible debts will be forgiven (discharged) at the end of the plan.

Chapter 13 and Sole Proprietors

A sole proprietor does not separate their personal and business debts on their taxes or bankruptcy paperwork. Consequently, the Bankruptcy Code allows persons with sole proprietorships to add all their debts together. Then the trustee will distribute the monthly repayment plan payments among the creditors.

Priority debts such as taxes should be paid in full and first. Secured debts such as furniture or motor vehicle loans are settled second, followed by non-priority unsecured debts like medical bills and credit cards.

It would be best if you treated all your creditors equally.

Once you discharge the bankruptcy at the end of the repayment plan, the trustee will forgive all unpaid non-priority unsecured debts. It applies to both personal and business debts.

Advantages of Filing Chapter 13 to a Sole Proprietor

Chapter 13 has features that can help you keep your business running after bringing a bankruptcy case, including:

  • Keeping your business assets — All bankruptcy filers can exempt (protect) specific items required to maintain their work and home. It is suitable for you because you need equipment to keep running your business. This benefit allows you to keep both non-exempt and exempt property. However, it comes with a cost.
  • Non-exempt property — If you have non-exempt property, Chapter 13 permits you to keep it as you repay your debts. It is different from Chapter 7, where the trustee ceases the non-exempt property and sells it. However, you should note that you will repay the non-exempt property's value in the plan. Sometimes, this could be expensive, especially if you've valuable equipment, fixtures, and stock.
  • Exempt assets — The "tools of the trade" exemption keeps your business-related property up to specific dollar amounts. Since every industry has its equipment needs, the exemption statute allows you to select the asset you want to keep. For example, if you're an accountant, you might need software, a desk, and a computer.
  • Allows you to repay essential lenders — If you have priority debts such as taxes, you could pay them in the plan if you're a sole proprietor.
  • Cram down your secured loan —Through the repayment plan, you can lower the balance of specific secured debts to the current worth of the assets. The option reduces your burden on the company by consolidating the loans into the plan and reducing the monthly payments.
  • Wipe out your business debts — As previously mentioned, there is no difference between personal debts and business debts as in sole proprietorship. You will include all debts, and like all filers, you will pay a portion of debts that your collateral does not secure, including unpaid invoices, medical bills, utility bills, and credit card balance. You will acquire a discharge of all qualifying balances once you complete the repayment plan. After the discharge, your creditor can neither collect anything from you nor your business.

The Relationship Between Chapter 13 and Separate Business Entities

If your business is a separate legal entity like a corporation, LLC, or partnership, Chapter 13 bankruptcy removes the filer's liability from the debt. That means that the borrower will not be responsible for the loan, and the business will be.

The repayment plan should pay all the filer's priority debts, such as personal taxes and child support. Please note that you cannot use the payment to clear the business debts.

The Disadvantage of Bringing Chapter 13

Even if you're eligible, Chapter 13 might not be the best choice. The repayment plan that permits you to keep your property will take three (3) to five (5) years to repay. During that period, you cannot take on another loan. If you want to wrap up the business while paying off your debts, that might not be a deal. If you desire to keep running the business as you complete your repayment plan, you will find that you put yourself in a bad position.

Generally, people search for bankruptcy options because their business isn't solvent and the expenses are higher than the income. Chapter 13 could interfere with the ability to acquire a new loan and keep the business doors open. You need strong negotiation skills without investors and creditors. Otherwise, you will go out of business.

Find Knowledgeable and Experienced Bankruptcy Attorney Near Me

If you're in financial challenges and struggling to clear your debts, filing bankruptcy might be your viable option. While deciding to bring a bankruptcy case is a daunting and scary decision, it does not have to be your business' end. The legal team at Los Angeles Bankruptcy Attorney will tell you that business tycoons file bankruptcy and later get through it. However, if you contemplate this option, you should understand the current and future effects of bankruptcy on the business. For many years, we have represented thousands of clients and are knowledgeable about the pros and cons of filing both Chapter 13 and Chapter 7. We can also advise you on bankruptcy alternatives that might meet your business needs. You can reach us at 424-285-5525 to discuss debt relief options for the business.