A Chapter 7 Can . . . Help You Walk Away from Your Business Yet Preserve Your Business Assets

Posted by Kevin on February 23, 2015 under Bankruptcy Blog | Comments are off for this article

Often, by the time you are ready to file a personal bankruptcy, your business has no meaningful assets—no inventory or equipment, no receivables, no brand or business name that you could sell. That simplifies your situation because, whether the business is in your own name or under an assumed business name as a sole proprietorship, or is in the form of a corporation, limited liability company, or partnership, its lack of assets avoids a bunch of thorny issues. If your business doesn’t have any assets you don’t need to worry about how to protect them, or how to distribute them to the business’ creditors

BUT, what  if your business DOES have some assets?

As long as your prior business was in the form of a sole proprietorship, your personal bankruptcy filing will immediately protect your business assets (as well as your personal ones) from seizure by garnishment, foreclosure, repossession and such. That’s because the assets of your business are legally treated as your assets, and are thus protected by your bankruptcy.

As for secured debts related to the business—secured by collateral like your business vehicle or equipment, for example—the creditor would be prevented from repossessing its collateral, at least temporarily. That gives time for your attorney to offer for you to “reaffirm” the debt—agree to remain personally liable on it—so that you can keep the collateral. Unless the collateral is worth more than what is owed on it—not likely—your Chapter 7 trustee would have no interest in the collateral.

Instead, the trustee will be interested in your “free and clear” business assets (not subject to a lien). However, you will be able to keep such assets to the extent they are covered by your personal “exemptions.”

A property exemption is a provision in state or federal law that allows you to shelter an asset from your creditors, and thus also from the Chapter 7 bankruptcy trustee who acts on behalf of all your creditors. Exemption laws can be quite complicated, and differ from state to state, often radically. In some states you must use that state’s system of exemptions, while in other states you have a choice of using either the state’s exemptions or a set of federal exemptions provided in the Bankruptcy Code.  In NJ, you can choose; however, since the NJ exempts are so puny, about 98% of debtors pick the federal exemptions.

The federal tool of trade is as follows:

The debtor’s aggregate interest, not to exceed $2,175 in value, in any implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor.

(the $2,175 amount is for cases filed through March 31, 2013). This amount is doubled for married couples filing jointly, as long as the asset is jointly owned.  Admittedly, that does not sound like a lot of money.  However, you do not value the property as if it were new.  It is valued in its “as is, where is” condition.   In some cases, the value can be pennies on the dollar.  If the trustee differs with your valuation, he or she will have to bring in an appraiser to challenge your valuation.  If the trustee loses this battle in court, then there is no money in he estate to pay the appraiser.  A trustee does not want to get into that position, so he or she will either abandon the property to the debtor or engage in some “horse trading”.  The bottomline is that the debtor stands a good chance of getting the bulk of his business property for free or at a nominal cost.