Protect your business assets immediately with the “automatic stay” and permanently with property exemptions.
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, even if your business DOES have some assets, as long as that business is a sole proprietorship, filing a personal Chapter 7 case often provides you a sensible way for dealing with those remaining business assets. You may be able to keep those assets if you need them, or if not, you can let your Chapter 7 trustee sell them and pay some of your most important creditors. This blog covers hanging onto business assets; the next blog—the last in this series on business bankruptcy—covers the trustee using them to pay your creditors.
Business Assets Protected by the “Automatic Stay”
You may want to keep business assets which you need to use to generate income after your bankruptcy—either as an employee or through self-employment.
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.
Business Assets Protected by Property “Exemptions”
Instead, the trustee will be interested in your “free and clear” business assets. 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. Also, you have to live in a state for a certain length of time before you can use the exemptions available to the residents of that state. So this process involves much more than just a simplistic matching of your list of assets against a table of allowed exemptions.
Examples of Business Property “Exemptions”
Most states either have an exemption specifically for tools of trade, which generally covers just about anything used for earning a living, up to a certain dollar value, or else they have a pooled exemption which can include any of various kinds of property including tools of trade, up to a certain dollar amount.
An example of the specific exemption is the following statute from Oregon (a state which requires the use of its state exemptions for bankruptcies filed by its residents), exempting:
The tools, implements, apparatus, team, harness or library, necessary to enable the judgment debtor to carry on the trade, occupation or profession by which the judgment debtor habitually earns a living, to the value of $5,000.
ORS 18.345(1)(c). This $5,000 amount can be doubled in a joint bankruptcy filing by a married couple as long as the business property is jointly owned by them.
An example of a pooled exemption is from Texas (a state which allows either the use of its state exemptions or the federal ones), which provides an exemption of $60,000 for a family, or $30,000 for a single person, covering a pool of personal property including:
(3) farming and ranching vehicles and implements;
(4) tools, equipment, books and apparatus, including boats and motor vehicles used in a trade or profession…
Texas Property Code, Section 42.002(a)(3) and (4).
The federal tool of trade exemption is only available in a minority of states, such as Texas, which allow it. In those states you have a choice between using the state or federal set of exemptions, depending on which is better for your overall situation. The applicable federal exemption 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.
Section 522(d)(6)(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.
These three examples show some of the wide diversity among the exemptions potentially available for your business assets, and give you an idea how your previous business’ assets could still do you some good into the future.