If I file a Chapter 7 Bankruptcy will my Business Interests be Protected?
Like so many other legal answers, the answer to whether your business will be protected when you file a Chapter 7 is “it depends.” The idea behind Chapter 7 is that by law you are able to protect a certain amount of property; any amount of property over what you can protect goes to the Trustee to satisfy your debts. So the question is really whether you will be able to “exempt,” or in other words, protect your business assets.
The first question in addressing whether a business will be protected, oddly enough, has nothing to do with your business. The first question is really how much equity you have in your “big ticket” items, like your homestead and vehicles. The reason the amount of equity matters is because it determines what set of property exemptions you will be using. There are two sets of property exemptions available to Texas residents: the Texas exemptions and the Federal exemptions (you can read about the different exemptions further here: https://fearslaw.wpengine.com/property-exemptions-available-to-texas-residents-in-bankruptcy/).
Under Texas law, as an individual, you are allowed to protect up to $30,000.00 worth of business equipment under the Texas “Tools of the Trade” property exemption. This will include things like tools and equipment (including motor vehicles). However, the value of this exemption is reduced by the equity in other property you have; including vehicles, household goods, guns, jewelry, etc.
Under the Federal exemptions, you are able to protect up to $2,300.00 in tools of the trade.
However, under Federal law you also have access to what is called the “Wild Card” exemption, which can provide up to an additional $12,000.00 in property protection for an individual. This is a flexible exemption; which can protect bank accounts, business equipment, furniture, etc.
The set of property exemptions you choose is largely going to depend on the amount of equity in your homestead and vehicles. If you have a large amount of equity in your homestead and vehicles, most of the time the Texas property exemptions will be your best bet. If you have limited equity, usually the Federal exemptions will serve you best.
Once you determine what set of exemptions is best for you based on the valuation of your homestead and vehicles, the next question is, what is the value of your business interest? The value of a business interest is usually analyzed based on several factors, including: your ownership percentage, the business’ income versus expenses, and business assets. For most Chapter 7 debtors, the value of the business is primarily determined by the business’ assets. Typical assets of businesses include: accounts receivable, bank balances, inventory, intellectual property, customer lists, equipment, and machinery. This numerical valuation will be the principal determination of whether your business interests would be protected in a Chapter 7. For most of our clients, we are able to walk them through the bankruptcy process without them having to surrender any interest in their businesses.
Determining whether your business interests are exempt under the law can be very complicated and every business is different, with different needs. If you are operating a business and considering bankruptcy for yourself or the business entity, you would be well served to consult with an attorney regarding your options. The attorneys at Fears Nachawati would be happy to guide you and advise you what your best course of action is.