Can Bankruptcy Affect my Business?

August 31, 2015

Can Bankruptcy Affect my Business? Filing Chapter 7 May Not Affect Your Business

If you file for Chapter 7 bankruptcy, it may not necessarily affect your business. A personal bankruptcy is designed to eliminate your personal liability for your debts. Bankruptcy many times will not affect your business: a few examples below, however, will show how bankruptcy in some situations can drastically affect your business. 

Business High Property Amounts or High Business Value Can Be a Problem

Whether your business is a separate entity (such as a corporation or LLC) or a sole proprietorship, you OWN your business. Therefore, whether you own 100%, 50%, or whatever the percentage, it can become property that your bankruptcy trustee can use to help repay some creditors in your case. The general rule is whether non-exempt assets in the business or the business itself can be sold to repay creditors. If your business does not have high amounts of property or value, it may likely be okay. 

In addition, if your business is also heavily laden with debt, your business debts may greatly exceed your business assets. In such a debt laden situation, it is much less likely the business or the assets can be sold. Any business property situation MUST be assessed by an attorney because every situation is different. Without proper complete evaluation, you could put yourself unwittingly in a position where business property or the business itself can be sold!

Co-Mingle Problems Such as Accounts Receivable and Business Bank Accounts

Many times small business owners will co-mingle their business and personal lives. At the time of their bankruptcy, there may be large amounts of accounts receivables or bank accounts balances unrelated to their personal life but still exposable as an asset to the bankruptcy trustee. The Debtor that was $2500 in their checking account for a construction job’s materials may have a problem. The same Debtor if still owed $3500 for a previous construction job may have a double-problem. As an example, this $6,000 (especially if it is being run under personal accounts) could have to turn over those amounts to the bankruptcy estate. 

Such situations are not “fair” per say, but meet the “black and white letter” of the bankruptcy code and state exemption amounts. It may be best to have no business money in possession or owed to you at the time in which you file for Chapter 7 relief. Of course, separately held and clearly operated corporations (or other entities) may have a greater level of protection from in such matters. In separate entity situations, the entire entity is usually assessed by the trustee as opposed to individual amounts owed or in possession of the corporation at the time of filing. Because of abuse sections in the bankruptcy code and differing situations, this may not always be the case, however. Once again, consultation and guidance of an attorney are very important. 

Filing Bankruptcy on Your Business Instead of Personal Bankruptcy

Of course, multiple articles or even books would be required to fully discuss business bankruptcy. But, within the scope of this article, it is important to point out a couple aspects. First, if you file business bankruptcy (unless Chapter 11), the court will assume that you are no longer going to continue with operations. All remaining assets of the business are solid to creditors and you will close the business. You will then need to start a new corporation or entity if you desire to engage in similar business in the future. 

Second, sometimes a personal and business bankruptcy should be both be filed. In this way, a clear message is sent to all creditors that the old business is over and no assets (or whatever assets administered) are available. Then, if future desire to participate in some similar business is desired, a completely new corporation (or set of books) should be used in the future. Business bankruptcy is very complex and should not be attempted without the aid of an attorney and an accountant. 

Chapter 7 May Not Be The “End” For Your Business

Filing a Chapter 7 case may signal the end of your business: sometimes it can signal a new beginning. If your former debt situation was impossible to resolve, sometimes the only way you can continue in your same line of business may be to get relief in Chapter 7. Starting over can be difficult, but staying in a crushing debt situation can be much worse or even impossible. Do not stay forever in an unprofitable, impossible business situation. Contact a our office and get a free consultation to see what options you have. 

~Indianapolis Bankruptcy Attorney John Bymaster


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