Should the Owner of a Small Business File a Personal Bankruptcy? Part 2

Apr 24, 2014 | Bankruptcy

How do I File a Personal Bankruptcy without Closing Up Shop?

If your business has a lot of assets, usually it will have to close when you file for personal chapter 7 bankruptcy. The bankruptcy trustee will sell the assets of the business and use the money to pay your creditors. He may also sell the business as a whole. Whatever the cause, the effect will be that your business is closed.

However, there are circumstances where a business will survive the individual Chapter 7 bankruptcy process and prosper when it’s over. You might be surprised how many small businesses owners fall into this category.

Types of Businesses that Survive Chapter 7 Bankruptcy

Ask yourself the following questions. If you answer yes to all of them, there is a good chance you will be able to file a personal Chapter 7 bankruptcy and eliminate all your debt while preserving your business.

1)     Is your business a service-oriented business?

2)     Is the value of your business mostly in the expertise and/or labor that you provide?

3)     Does your business only have a small amount of physical assets?

4)     Does your business require only a limited amount of valuable inventory?

5)     If your business requires tools or equipment, is the total used value of the equipment under $2,500?

If your business is a service oriented business, and the value of the business is based on the expertise and/or labor that you provide, there is little the trustee can do to cause your business to close when you file for bankruptcy. He can’t sell your labor or expertise. Consequently, it is important to take stock of the value of your physical assets and inventory. The less they are worth, the less likely it will be that the trustee will sell any of these assets as part of your bankruptcy.

Tools and equipment used in your business are treated differently than physical assets and inventory. The bankruptcy rules allow you to protect a certain amount of business “tools of the trade.” Even if you have an expensive set of tools or equipment, they can often be protected under a bankruptcy exemption. If so, the trustee cannot sell these assets.

In part 2 we saw what businesses are good candidates for chapter 7 bankruptcy. In part 3 we will see one more way a business can qualify, and learn what the personal bankruptcy process is like for a business.

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