Can I continue to run my business if I file Bankruptcy?

This is the most important question most business owners want to know. The answer depends upon 2 issues. First is how the business is organized. The second is what type of bankruptcy is filed.

In a Chapter 7 straight Bankruptcy, If you have a corporation, a limited liability company or a partnership filing, the company ceases to exist upon filing of the case.

Bankruptcy code 11 U. S. Section 721 lays out when a Chapter 7 Bankruptcy Trustee can run a business.  Even then the Chapter 7 Trustee cannot do so without first getting permission from the Bankruptcy Court. The ability to run the business is only going to be allowed for a short period of time. It is only allowed if the business could be sold for more money than if the business was closed.

Nowhere in the bankruptcy code does it authorize you, the debtor to run a business in a Chapter 7 bankruptcy.

If you want to keep a corporation or business, other than a sole proprietorship, open you would have to file a Chapter 11 reorganization. For the individual or small business, a Chapter 11 reorganization is cost prohibitive and the success rate is extremely low.

A large percentage of small businesses are sole proprietorship’s. That means legally, there is no difference between you and the business.

A sole proprietorship business uses your own name or using a DBA. An example would be ”John Smith” doing business as ”Smith plumbing” or “Midtown Plumbing.”

For a sole proprietorship, there is no difference between business and personal debt.  You are liable for all the debts no matter the source.

You cannot file Chapter 7 Bankruptcy just for the sole proprietorship business. It isn’t a separate entity from you. That is the same reason why you cannot file a personal Chapter 7 Bankruptcy that doesn’t involve the business.

One way to keep a sole proprietorship business open is by filing a Chapter 13 Bankruptcy debt reorganization. There are very strict limitations as to the amount of secured and unsecured debt. If the debt exceeds those limits, you cannot use Chapter 13 to reorganize your debts.

One of the reasons a Chapter 7 Bankruptcy Trustee does not want you as the debtor to run a business is their liability for your actions. Chapter 7 Bankruptcy Trustees have been sued and held liable for injuries caused by businesses they did not shut down as required under bankruptcy laws.

Because of that liability, Trustees are becoming more hardnosed about shutting down sole proprietorship businesses.

This can pose a huge problem if that is income you need for your living expenses.

If it is essentially a service business you may be able to file a motion in the Bankruptcy court asking the Bankruptcy judge to order the business abandoned back to you and out of the Bankruptcy estate.

If the business assets have little value and can be exempt, the Trustee will often not oppose the motion. Once you get that order, the business is no longer an asset of the Bankruptcy estate. That means businesses all yours. The Trustee cannot be sued for anything that happens after you have regained complete ownership of the business.

If this is a real estate sales business, mortgage broker business, insurance business, or multilevel marketing business there are often assets for the Bankruptcy Trustee to administer and sell to pay creditors.

This includes funds commissions on sales where the contract has been signed before the Bankruptcy was filed but the escrow closes after the Bankruptcy filing.

Other examples would be residuals from insurance sales, payments to you from your downline in multi-level marketing like ”Mary Kay” or ”Amway.”

If you have any type of book of business that could be sold to someone who has the right credentials, a Chapter 7 Bankruptcy Trustee can sell that.

If you have something of value that the Bankruptcy Trustee could sell, you may be able to work out a deal to buy the asset back.

If you are a business owner, it is absolutely vital to you to not attempt to represent yourself, unless you are willing to have your business shut down or possibly even sold.

Look for an attorney that is a Bankruptcy Law Specialist in your area. The California State Bar has a list of attorneys they have certified as Bankruptcy law specialists. It is broken down by County, so you can find a Certified Bankruptcy Law Specialist close to you.

I’m CA State Bar Certified Bankruptcy Law Specialist Gary Fraley. For over 42 years I have served Northern California & Central Valley clients. You can find more useful information at my office website: SacramentoBankruptcyAttorneys.com                                                                   

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