Can Business Assets Be Touched if You File Personal Bankruptcy?

By Stephanie Kurose, J.D.

Can Business Assets Be Touched if You File Personal Bankruptcy?

By Stephanie Kurose, J.D.

If you own a business and you file for personal bankruptcy, creditors can seize your business assets to pay outstanding debts in certain circumstances. Whether filing puts your business in jeopardy depends on the structure of the business and its value. It also depends on the type of bankruptcy you file.

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In some cases, filing for personal bankruptcy forces you to shut down temporarily or permanently or turn over your business to the trustee, the person in charge of handling and overseeing such cases.

Types of Bankruptcy and Disclosure of Assets

When you file for bankruptcy, you must identify all your assets and sources of income to your creditors as well as to the assigned trustee. It does not matter what type of business you own—a sole proprietorship, partnership, limited liability company (LLC), or corporation. The trustee looks at your assets and sources of income and tries to find the best way for you to pay off your debts within a certain time frame. You must disclose all of your assets, including business assets such as stocks, shares, equipment, and tools, in your petition.

The type of bankruptcy—Chapter 13 or Chapter 7—affects which assets the trustee and creditors can seize. Chapter 7 is the most common type of filing. It requires the trustee to liquidate all of the filer's assets in order to satisfy any debt claims. In a Chapter 7 filing, the filer's business assets may be part of that liquidation. Alternatively, Chapter 13 bankruptcy does not liquidate the filer's assets but instead creates a strict payment plan and personal living budget that requires the filer to make regular payments to the trustee, who divides the payments and distributes funds to creditors. An individual may only qualify for Chapter 13 if they have significant disposable income.

Business Structure

The type of business you own determines whether the trustee can sell the business itself, business assets, or the corporate stock you own.

Sole Proprietorships

If you own a sole proprietorship, there is no legal distinction between you and your business, or your personal assets and your business assets, so your business assets are at risk. A trustee can liquidate all of your assets to raise money to pay off as much of your debt as possible. A trustee can also insist that you shut down any business operations until they can assess the value of the business.

Corporations and LLCs

Unlike sole proprietorships, corporations and LLCs are distinct legal entities that are separate from their owners. If you own a portion of a corporation or are a member of an LLC, only the portion attributed to you can be part of your bankruptcy estate. For example, if you own 50 shares of a corporation, those 50 shares are the only business assets the trustee can potentially sell. In the meantime, the corporation or LLC continues to operate.

Filing for personal bankruptcy is a major decision, especially if you also own a business. If you own a business with others, regardless of the type of business structure you operate, speak to them regarding what next steps should be taken before making any determinations. Consider your options, and which type of bankruptcy is the most appropriate for your circumstances.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.