05-Oct-2012

Written By Charles B. Sellers

It is a very common occurrence for someone to contemplate filing bankruptcy and ask the question, “What happens to my business?”

The answer to that question depends on the business and whether or not a separate/distinct entity was validly formed to conduct that business.  The bankruptcy code specifies that bankruptcy is available to a “person” as defined in 11 U.S.C. Section 101(41).  The term “person” includes individuals, partnerships, and corporations.

Consider the following hypothetical:

A person named Bob has a sole proprietor window cleaning business (even if operating under a trade name) and falls on unfortunate hard times.  Bob’s business is a service oriented business that is ultimately dependant upon his performance of window cleaning services.  He has both personal debts and debts directly related to the operation of the window cleaning business.  He decides that the best way to resolve his debts is to seek protection under Chapter 7 of the bankruptcy code.

By filing bankruptcy, Bob must be aware that not only are his personal assets subject to the bankruptcy but so too are the assets used in the window cleaning business itself.  If personal assets or assets of the business are not protected under a specific exemption, Bob runs the risk of losing those items by filing bankruptcy.  Because Bob operated his business as a sole proprietorship, he is not now able to separate the bankruptcy filing from his business.  All of Bob’s personal assets and the assets of the business are made part of the bankruptcy.  If Bob has minimally valued assets that are used in the operation of the business, he may be able to claim a specific exemption that covers those items as tools of his trade (contingent upon their current use and dollar values).  This exemption is in addition to any other available exemption that Bob may be able to claim on his own personal assets.

If Bob can apply an exemption protecting all of the business assets, then even though he has filed bankruptcy he may be able to keep the business assets and carry on operating the business post-bankruptcy filing.

If you have questions about bankruptcy, we encourage you to attend one of our free seminars or contact us today.