A 12-part Series On All You Need To Know About The Process of Filing for Chapter 7 Bankruptcy
Part Eleven – Ownership in Business in Chapter 7
Filing Chapter 7 bankruptcy can impact a debtor’s business ownership. In a Chapter 7 bankruptcy a trustee is appointed to liquidate all the debtor’s non-exempt assets. In a Chapter 7 filing he debtors’ ownership in a business may be considered an asset that can be liquidated, and this means the business must be appraised to see what the value of the business is.
If the business is a Sole Proprietorship there is no distinction between the business and the debtor therefore all the business’s assets are the debtor’s assets and must be either exempted or the asset will be liquidated.
If the business is a Limited Liability Company or a Corporation the law sees these as separate entities. Only the portion of the business owned by the debtor filing bankruptcy is affected. The business will continue to operate with the debtor’s equity in the business becoming an asset in the Chapter 7 bankruptcy.
Here is the kicker; although the business may be appraised it is the trustee or the Court that will ultimately place a value on the business. Depending on the circumstances, the Trustee could sell the company itself or the debtor’s ownership in the company depending on how the business is organized.
If the business is a sole proprietorship, then the entire business and all the assets in the business are considered to belong to the debtors and it all will need to be exempted or it will be liquidated. If the business is a Limited Liability Company or a Corporation then the debtor will need to exempt their ownership interest or shares. If the debtor is the sole shareholder, then it’s treated much like a sole proprietorship and all the company assets will need to be exempted and if not, they will be liquidated by the trustee. If the debtor only owns a portion of the company, then the value of that asset (or value of the shares of the company) will need to be exempt, and the only real exemption is the wild card exemption.