Personal Bankruptcy's Effect Upon Debtor's Small Business

Many people who file Chapter 7 bankruptcy are self-employed owners of a small business. The business is not doing well, and the owners have accumulated substantial personal debt to support the business and pay personal living expenses while the business could not support them. In many of these bankruptcy situations the debtor would like to keep the business after bankruptcy. They want to know what will happen to their business if they file personal bankruptcy. 

The debtor’s stock, or membership interest, in the business is the asset which he list on his Chapter 7 petition. The value of stock is determined by the business’ balance sheet, not the business income.  The simplest way to estimate the bankruptcy value of your business is to compare the amounts of business assets and business debt. The business may have significant assets, including cash and receivables, but if the business also has debts, including debt to suppliers or landlords, the business. Other factors such as goodwill could also affect value. If the debtor believes his business stock has zero or little value he can claim the stock as an exempt asset.  

A bankruptcy trustee may challenge your business valuation and object to your exemption. Many trustees will object if they believe that the debtor places value on his business even though reasonable valuation tools show the business stock has no value. Trustees often challenge exemption of the debtor’s business if they think the debtor is willing and able to pay the trustee and the estate some money for the privilege of keeping the business alive after bankruptcy. Some debtors complain that this trustee tactic amounts to extortion of unfortunate debtors, but trustees would argue that they are doing their job to extract whatever money is available for the benefit of creditors who are rightfully owed money.

In any event, if you are the self-employed owner of a small business you are risking your business if you file Chapter 7 bankruptcy. Do not let anyone tell you that your business will simply flow through a Chapter 7 just because the business balance sheet shows no positive net worth.  You should consider the possibility that you may have to offer your business to the bankruptcy trustee and start a new business after you file personal bankruptcy. The best way to negotiate with a trustee over the value of your business is being willing to walk away from the business when you file Chapter 7 bankruptcy.