Monday, November 21, 2011

Will I lose my business if I file personal Chapter 7 bankruptcy?

Published on by: Ian M. Falcone

I am often asked whether a client will lose their business if they file for personal Chapter 7 bankruptcy. The short answer, of course, is, it depends. A business is an asset. And, like any asset, it must be listed in your schedules and is subject to liquidation by the Trustee.

If you owned shares of stock in Coca-Cola and filed a chapter 7 case, the Trustee would have the opportunity to sell your shares, raise money and ultimately distribute funds to the creditors. The same is true in your personal case, but the situation is far more complicated.

First, there is an easy market in which to sell shares of Coca-Cola. This is most often not the case for a small business. Secondly, most small businesses simply have no real market value. Often, they have very limited assets and substantial debts. For example, if you are a plumber, you probably own a truck, some hand tools and a limited amount of parts. The real value of your business is you. What could the Trustee possibly sell? However, if you are a bookstore, the value of your business lies in its inventory and its goodwill. Basically, the more the business is service oriented, the less likely it has a value and therefore, is less likely to be sold by the Trustee.

We always ask our clients for the quick sale value of the business' assets and the debt associated with the business. If there is more debt than value, we usually list the value of the business as zero. In these cases, the Trustee typically conducts a cursory investigation and agrees with our analysis. The end result, the client gets to keep their business.

This is obviously a complicated and very fact specific area of law. If you own a business and are thinking of filing personal bankruptcy, be sure to discuss the situation in detail with your attorney. Not every attorney is prepared to handle these cases. Ask whether they handle business related cases. Be honest with your lawyer. They cannot do their job unless you tell them the truth.

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