As a New Jersey bankruptcy lawyer, 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. However, this can become a problem if that small business owner decides to file a Chapter 7 bankruptcy.
This is because their 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 with bankruptcy with caution and consult an attorney about the details. Here's why.
The Bankruptcy Trustee Might Sell Your Business
In the case of a sole proprietorship, you are the business, and the business is you. Any business asset 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. The business 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
However, if the business's sole owner(s) 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 owner of the business can exempt the assets
- The business assets have no real value outside the business
- 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 their 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.
