Will I Lose My Business if I file for Bankruptcy?
When you file for bankruptcy and you take an inventory of things you own, you often will look at your physical possessions, and, of course, your financial assets, like bank accounts or investments. But if you own a business, that is an item of value also. For many consumers, their business is how they will start their financial lives over again after bankruptcy. They simply cannot afford to lose their business in a bankruptcy.
As a general rule, your business must cease operations when you file for bankruptcy, regardless of whether it will ultimately be taken. You will only be able to continue to operate your business with the trustee’s permission.
If the trustee does require that you turn over the business during the bankruptcy process, the trustee becomes the temporary manager of the business. However, this can cause problems for the trustee. Businesses where there may be liability, lawsuits, or which the trustee does not have the know how or ability to run may be allowed to continue to operate as usual, as the trustee may not want to take any legal risk.
The Kind of Business Matters
Whether or not the bankruptcy trustee will take your business—or at least, close your business for a period of time—depends on the kind of business and the size of business that you own. As a general rule, businesses that have no significant assets, will be allowed to stay open, and the trustee will usually not take these kinds of businesses.
Businesses that are unique to you also are relatively safe. For example, if you have a wedding photography business, which is just you going to weddings to take pictures, the business is likely quite safe, unless you own a significant amount of valuable photography equipment.
If your business has assets—which can include physical property like machinery or inventory—it is more likely that the business has value, and can be taken by the trustee. Remember that unpaid accounts receivable may be counted as assets as well.
If your business is a sole proprietorship, your business’s assets are your assets. This could potentially put the property or assets that the business uses at risk of being taken unless they can fit into the personal property exemptions that you as an individual would receive.
In some cases, you may be a full or part owner in an LLC. In these cases, the bankruptcy could not take the business, but the trustee could get what is known as a charging order, which would allow the trustee to get whatever payments or distributions that are due and owed to you. However, the trustee cannot compel the LLC to pay them anything that the LLC would not ordinarily pay.
Remember that if your business risks being taken in a Chapter 7 you may have the option of filing for Chapter 13, In a Chapter 13, your business is more likely to remain in your name and be safe from being taken.