Over the years I have represented many self-employed individuals who are small business owners, either through sole proprietorships, LLCs, or subchapter S corporations. Usually, they are the only owner, or they own it with their spouse. This can become a problem, however, if that small business owner decides to file a chapter 7 bankruptcy.
This is because his or her ownership interest in the business is considered an asset in the bankruptcy and, in some cases, can be sold by the trustee! For this reason, small business owners should proceed towards bankruptcy with caution and consult with an attorney on the details. Here's why.
The Business Assets Are Your Assets
In the case of a sole proprietorship, you are the business, and the business is you. Any asset of the business is your asset, and can be sold to raise money to pay your creditors, unless it can be exempted.
An LLC or "sub S" corporation is a "closely held" or "Mom and Pop" business that shields the owner(s) from liability for business debt. It can own its own assets and owe its own debts. As it is not publicly traded, you are the business, and the business is you, so selling your ownership interest (as opposed to shares in Verizon, for example) is not a viable option for the trustee.
When the Trustee May Not Sell Your Business Assets
However, if the sole owner(s) of the business are the ones in bankruptcy, then the trustee may look to liquidate the business on behalf of the bankrupt owners by selling its assets and using the proceeds to pay debts. This may not happen in situations such as:
- The debts of the business meet or exceed the value of the assets;
- The debtor/owner of the business can exempt the assets;
- The business assets have no real value outside the business; or
- There are owners of the business who are not in bankruptcy and the company bylaws or operating agreement do not allow an owner (in this case the debtor) to sell his interest without the consent of the other owners.
If the business is failing, or has failed, and you just want out, this could be a moot point. However, if the business is doing well (or has the potential to do so) and it provides significant income to you, you should be aware of the risks before you file a chapter 7 bankruptcy.
So What Should I Do?
If you are a small business owner here in southern New Jersey and are considering bankruptcy, please feel free to call me at 856-432-4113 or contact me through this site to schedule a free consultation in my Woodbury office. I can help you to determine whether your business would be at risk if you filed.
If you are looking for more information about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.