Who Controls A Business's Asset When It Files For Bankruptcy?

by David Hoyer - Date: 2010-09-02 - Word Count: 482 Share This!

Individuals who wake up and find themselves knee deep in debt, with no recourse to repay the debt, have the option of filing for Chapter 7 bankruptcy to retire their debts. But, what many people are unaware of is that a business can file for Chapter 7 bankruptcy also.

When a business files for Chapter 7 bankruptcy, the assets of the business are liquidated and the proceeds distributed among the unsecured creditors. Once these assets are liquidated, the remaining debts are wiped out leaving the owners of the business to go on about their lives. But there are different types of businesses - corporations, partnerships, sole proprietors, limited liability partnerships, and so on. The bankruptcy rules are a bit different for each one of these.

For example, take the case of a company which is set up as a sole proprietorship. In this type of business, there is no real difference between you and your business. You are one and the same. Your income is the business's income and the debts of the business are yours. So if you file for Chapter 7 personal bankruptcy and have business assets, those assets can be sold to raise money to pay the people you own.

However, In reality, you have very limited control over which of your assets will be sold. Those decisions, for the most part, will be decided on by the bankruptcy trustee. For instance, assume that you are a sole proprietor and that you own a retail establishment. You may have inventory that, in theory, is worth a few thousand dollars. But, if the trustee makes the determination that the cost to sell them is not worth the possible income received, he may decide not to liquidate them. Thus leaving them in your possession. For other assets, he may make the exact opposite decision.

Irrespective of what assets you believe will or will not be liquidated,the process is the same. The bankruptcy trustee will follow the directives of the court and go through all of your assets with you and make a determination which assets are worth selling. In many cases, his final determination will effectively put you out of business.

For instance, assuming that you own an automobile fix-it/repair shop. And after the trustee looks over your records, he decides that selling your auto equipment and tools can effectively be sold for enough money to pay back some creditors. The trustee will probably have the assets seized and put up for sale or auction. In situations such as this, you end up with no equipment to carry on your business. In essence, you no longer have a business.

There is a way to prevent this, however. And that is applying for an exemption. If the exemption is not granted, however, you are out of luck.

All in all, which assets you get to keep and which ones you forfeit is largely in the hands of the bankruptcy trustee.

Related Tags: debt, bankruptcy, business bankruptcies, chapter 7 business bankruptcies

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