Can I Operate My Business In Chapter 7 Bankruptcy?
This is a very common question I get when clients come into my office. My answer is always “well maybe, maybe not, it depends.” Not the answer that they want but it is the truth. I then analyze their actual circumstances to be able to give them a better answer.
Here I will explain of the basic analysis I use.
Business in Chapter 7 Bankruptcy by Business Type:
If it is a Corporation:
If you own a corporation, it can continue to operate even if you file bankruptcy. If it has no value or the value is protected by exemptions, you can keep the business open. However, if the corporation is worth more than what it owes to its’ creditors and that value is not exempt, the bankruptcy Trustee could run the business and sell the stock or liquidate the corporation to pay your creditors.
If it is a Partnership:
If you are a general partner, the partnership ends when you file bankruptcy. End of story.
If it is a Sole Proprietorship (or Community Property Business):
Bankruptcy law says that the only person who can run a business is Chapter 7 Bankruptcy is the Bankruptcy Trustee, NOT you. Even the Bankruptcy Trustee cannot run a business in Chapter 7 bankruptcy without getting Bankruptcy Court authorization to do so and only long enough to sell the business. (11 U.S.C §704 & §721.)
Simply put, the Trustee can (and is supposed to) shut your business down if you file Chapter 7 Bankruptcy.
So, How Do I Keep My business in Chapter 7 bankruptcy Open?
If you file a Chapter 13 reorganization you can continue to run your business. However if Chapter 13 will not get you the result you need, this may not be an option.
In Chapter 7, if you are the sole proprietor with no employees, no inventory and only exempt assets (protected by state bankruptcy exemptions), you still may have a shot at continuing to run your business. This is best if you have a service business. Why? Because the Bankruptcy Trustee is loath to put someone in a position where they cannot make a living, as long as there is no real chance of hurting someone else and not harming your creditor’s rights.
Always understand that the choice of whether you keep your business open is totally up to the Bankruptcy Trustee.
Here are the things you need to do to have a chance to keep your business open.
Be prepared to show the trustee that:
1) The assets including the value of the business itself are protected (exempt);
2) You are not buying or selling business assets;
3) You have no inventory;
4) You do NOT have any employees;
5) You have all required licenses to run your business;
6) You have business and personal liability insurance (and will add the Trustee as insured);
7) It is a non-hazardous business;
and, most importantly
8) Your attorney must immediately file a Motion to Compel the Trustee to Abandon the business back to you.
Will That Be Enough?
Maybe. Probably. There is always a risk in subjecting even the smallest business to bankruptcy whether it is a massage therapist, handyman, accountant or attorney. The Trustee holds all your assets, even those which will be determined to be exempt, for the term of the bankruptcy unless there is an order removing the business from the bankruptcy estate.
If you have a business, do not try to represent yourself unless you are willing to have your business closed by the Trustee. Here is where the knowledge, experience and reputation of your Bankruptcy attorney may make all the difference in whether the Trustee closes your business or allows you to continue to run it.
Get a State Certified Bankruptcy Attorney such as myself to help you through the maze. I have over 35 years of experience in helping people with all kinds of circumstances through the bankruptcy experience. This is definitely an issue you don’t want to leave to chance or to an attorney who doesn’t know what he or she is doing. Call to make an appointment with me at (916) 485-5444 to discuss how your business in Chapter 7 bankruptcy would be affected.