Best Way For Chapter 7 Bankruptcy Debtor To List His Interest In His...

Many self-employed debtors file bankruptcy because they have personally guaranteed debt of their failing business. Some of these debtors want to discharge their guarantees of business bank loans or credit cards used for the business, and they want to try to resurrect the business after they have been cleared of personal liability. In such cases, the debtor has to value his interest in the business. The debtor must value his stock, membership interest, or other form of ownership in his business. Where the business had assets, but the business also has liabilities in excess of business assets the value of the debtor’s interest is probably zero because he could not sell to an unrelated third party his interest in his insolvent business. The business value is further reduced by the business’ dependence upon the debtor’s personal labor because a new buyer would have to pay someone to replace the debtor’s labor contribution.

There are two ways to list this type of insolvent business in the debtor’s personal Chapter 7 bankruptcy petition. The debtor could value his stock (or other interest) at zero, or he could value the stock at $1 and claim an exemption for the $1 interest as part of the debtor’s personal property exemption. The question is which is the best way to defend against a trustee challenge that the business interest is worth more money and is part of the debtor’s non-exempt bankruptcy estate.

I suggest that it may be better to value the business at a dollar and claim the exemption. The trustee has a limited amount of time, 30 days after conclusion of the creditor meeting, to object to exemptions. The trustee has a longer time, at least 60 days after the meeting, to file an adversary proceeding which asserts greater value to the debtor’s business and requests the debtor’s turnover of the business interest. Better for the debtor to impose a shorter challenge period upon the trustee by claiming a minimal value of an insolvent business and including the business interest in the exempt property list.