Prescott Pearson & Tande, PA has helped thousands of Minnesota business owners navigate through their personal and business financial struggles to find a solution to their debt. There are really two distinct areas that bankruptcy and a person’s business intersect: business as the cause of a person’s debt; and business as an asset in a person’s bankruptcy case. How each of these two distinct aspects of business ownership are affected in bankruptcy is determined by what type of business is involved.

In a sole proprietorship (vs. a corporation or LLC), you are doing business under your own or an assumed business name, but have not created a separate legal entity such as a corporation, partnership, or LLC. You are the business. All of the business’s assets belong to you, all of the debts of the business are your own debts, and all income earned by the business is yours. 

BANKRUPTCY OPTIONS IF I OPERATE A SOLE PROPRIETORSHIP

Since you are the business and the liabilities of the business are your personal liabilities, if the business has failed and there are significant debt issues, you may well need to file for a personal bankruptcy. You have the right, if you otherwise meet the qualifications, to file either a Chapter 7 or a Chapter 13 bankruptcy. If your debt is more than half business debt, then you can qualify for a Chapter 7 bankruptcy without regard to whether you pass or fail the means test.

ARE MY BUSINESS ASSETS PROTECTED?

If you file a Chapter 13, you can continue to operate your business during your Chapter 13 bankruptcy case with two caveats: First, your business must be generating net income for you (and not generating ongoing tax or other liabilities); and second, your Chapter 13 plan must distribute as much to your unsecured creditors as they would receive if you had filed a Chapter 7 bankruptcy case.  

If a sole proprietor files a Chapter 7 bankruptcy case, the assets of the business are assets of the sole proprietor. Business assets can be exempted, or protected from the bankruptcy trustee taking them if they fall within either Minnesota state or Federal exemption laws. Here’s how that works:

STATE BUSINESS EXEMPTION LAWS:

If you have elected to use the state exemptions to protect your assets, many of your business assets may be exempted as your tools of the trade. The exemption protects: “the tools, implements, machines, instruments, office furniture, stock in trade, and library reasonably necessary in the trade, business, or profession of the debtor, not exceeding $12,000 in value.”

Under the state exemptions, you cannot protect your business’s receivables, cash on hand, or funds in the bank. As stated above, if the business assets have a liquidatable value, or if someone would be willing to purchase them, the trustee could sell the business assets.

FEDERAL BUSINESS EXEMPTION LAWS:

If you have elected to use the federal exemptions to protect your assets, many of the business assets may be exempted as your tools of the trade. The exemption protects “the debtor’s aggregate interest, not to exceed $2,525.00 in value, in any implements, professional books, or tools of the trade of the debtor or the trade of a dependent of the debtor.” You can also use the “spillover” or “wildcard” exemption contained in 11 USC Sec 522(d)(5) to protect up to $13,900 in value of any other business assets including your business’s receivables, cash on hand and funds in the bank.

If the business assets are not subject to a security interest, and if their value is greater than the exemptions that the debtor can use to protect the assets, then the bankruptcy trustee could sell the business assets.

WHAT ABOUT BUSINESS OR BANK LIENS?

If the business has assets that are subject to a security interest, such as a vehicle with a lien on it or a business lien through an SBA lender, then the secured lender has the right to the property to pay the loan back. If the business stops paying on the loan secured by the business assets, then the lender will almost surely seek to recover the collateral securing the loan to try to pay the loan off.  

After the lender has recovered the collateral, it will sell the assets and apply the proceeds to the loan. We have worked with lenders to arrange for the business owner to purchase the assets back from the bank. This requires that the bank be reasonable in its expectations, that the business owner wants to buy back the property, and that the business owner has funds to pay to the bank to purchase the property back.

CAN I OPERATE MY SOLE PROPRIETOR BUSINESS AFTER FILING FOR PERSONAL BANKRUPTCY?

If you are able to protect enough of the business assets and tools of the trade to continue operating, then yes, you often can keep the business going. However, there are some issues a bankruptcy can cause that may make this difficult: 1) The business’s accounts receivables are assets in your bankruptcy case, and if you cannot exempt them, then the bankruptcy trustee can take them, which may cause a cash flow problem; and 2) If you filed bankruptcy against business suppliers or subcontractors, they may refuse to supply or work with you in the future. 

DETERMINING THE BEST OPTIONS 

If you are a business owner and are considering filing bankruptcy for yourself, your business, or both, your case will be complex. There are many moving parts and interrelationships between your finances and your business’s finances. Prescott, Pearson & Tande, PA has the experience to guide you through this difficult time in your life.