Before filing for bankruptcy, you'll want to know what will happen to your business. It's an important question. Business owners who file a personal Chapter 7 bankruptcy risk a temporary closure or losing the company entirely, both of which are bad outcomes. But, your business might not be closed in Chapter 7 at all.
The two factors that will play a large part in determining whether you can keep your business when filing for Chapter 7 bankruptcy are:
Once you understand what happens to your business in bankruptcy, you'll want to learn the other things you should know about a bankruptcy filing. Or take our quick ten-question bankruptcy quiz. It can help you spot potential bankruptcy issues fast.
Did you realize that the bankruptcy trustee holds your property in trust during bankruptcy, including your business? It's true, and a business-related lawsuit is the last thing a Chapter 7 trustee wants to handle, so expect the trustee to ask for proof of liability insurance. It's an easy way to minimize liability issues associated with a business remaining open in bankruptcy.
But that's only one factor the trustee will consider. The next is just as crucial and a bit more complicated.
A trustee concerned about valuable property growing legs and walking off will shutter the company and conduct an asset inventory. But if your business doesn't have anything the trustee can sell, it's unlikely the trustee will pay much attention to it, and the trustee will be less inclined to close it.
So how will you know whether the trustee can sell off part or even all of your business? You'll apply the Chapter 7 property rules to all of your assets, regardless of whether you use something for personal or business purposes. Here are the Chapter 7 basics:
In this context—that is, when assessing your business—pay attention to what you actually own. For instance, a sole proprietor owns all business property. But if the company is an LLC or corporation, you won't own any business property—you'll own shares or an interest in the company. That's what you'll exempt.
Be aware that we use simplified scenarios for illustrative purposes, and your case will be more complex. The best way to avoid unnecessary loss is by consulting with a local business bankruptcy attorney about your particular case.
Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.
Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.
More Bankruptcy Information
Bankruptcy Forms and Document Checklist
Schedule C: The Property You Claim as Exempt
Chapter 7 and 13 Bankruptcy Form List
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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.
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