Bankruptcy

Can a Small Business Owner File Chapter 7 Personally and Still Keep His Business

By Jonathan

Over the past few weeks, I have received a number of calls from small business operators who want to file Chapter 7 on credit card debt, but continue to operate their businesses.  In many of these cases, the business owner used personal credit cards to fund business operations and now the business is profitable or marginally profitable but for the debt service on tens of thousands of dollars of credit card debt.

Unfortunately the answer I have to give to these prospective clients is not what they want to hear. If you own a small business and are incorporated, the shares of that business are assets. In turn, any accounts receivable for that business are an asset of the business that accrues to the shareholders.

Except in the case of a personal service business that has no inventory or receivables or any value other than the daily efforts of the owner, my experience has been that if you file a Chapter 7, the trustee will demand that you cease operations and turn over the books, the keys and the inventory to the trustee's office.

In my experience, therefore, if I meet with a small businessperson who wants to file Chapter 7, I usually end up advising that if he wants to file Chapter 7, he needs to be prepared to close the doors to his business and "start over."

Sometimes that businessperson can start over by forming a new corporation and resuming operations but that can be tricky as well and could result in challenges to the bankruptcy. Often the best course of action would be to close the doors to the business, take a job making a set salary, then file for bankruptcy. Thereafter, I often counsel my clients to wait 6 months or a year before resuming their entrepreneurial enterprise.

Of course every case is different and if you are a small business person with personal and/or combined personal and business credit card debt you should seek counsel for legal advice specific to your situation. However, do not be surprised if your lawyer advises you that you may need to close the doors to your business.

Full post as published by The BK Blawg on April 29, 2009 (boomark / email).