How to Keep Business Assets During a Bankruptcy

When a person or entity files for bankruptcy protection, his or her assets immediately become a part of the bankruptcy estate, which is temporarily controlled and managed by the United States Trustee (“Trustee”) appointed to the case by the Court. The Trustee is charged with managing the assets during the course of the bankruptcy, and if necessary, selling the assets and distributing the funds to the filer’s creditors. The Trustee then returns the filer’s remaining, or exempt, assets to him or her and the Court closes out the bankruptcy case. In order to keep assets during a bankruptcy, one must prevent them from becoming a part of the bankruptcy estate, or use his or her exemptions to prevent them from being sold in order to pay the estate’s creditors. If the assets you wish to keep are business assets, there are several things you can do to accomplish this:


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    Structure your business properly. Perhaps the most important step in protecting business assets is to structure your business properly from the beginning. Possible choices for business structures include general or limited partnership, sole proprietorship, limited liability companies, and corporations. Each type of business offers different asset protection features, and is eligible for different types of bankruptcy filings.
    • Sole proprietorship. A Sole Proprietorship is an unincorporated business owned by one person. Because all of the debts and assets of a sole proprietorship are owned by that one person, they are considered debts and assets of the individual owner. Sole proprietors may be eligible for Chapter 7, Chapter 11, or Chapter 13 filing.
    • Partnership. A Partnership is a business relationship between two or more persons who each contribute property, money, or labor in exchange for sharing in the profit or loss of the business. A partnership may be eligible for both Chapter 7 or Chapter 11 protection.
    • Limited Liability Company (“LLC”). An LLC is a business structure allowed by state law. Under federal law, an LLC is considered a corporation for tax and bankruptcy filing purposes. An LLC may be eligible for either a Chapter 7 or a Chapter 11 bankruptcy.
    • Corporation. A Corporation is owned by shareholders who exchange money and property for the Corporation’s capital stock. Corporations may file for bankruptcy protection under wither Chapter 7 or Chapter 11 of the bankruptcy code.
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    Convert non-protected assets to protected ones. A debtor may be able to convert certain non-protected assets, which would be liquidated or used to pay a portion of his or her debt in a bankruptcy, to protected assets, which do not become a part of the bankruptcy estate and/or are exempt from liquidation. Converting assets must be done according to very strict rules, and you should consult with an attorney before selling or purchasing any property while contemplating filing for bankruptcy protection.
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    File under the appropriate chapter of the bankruptcy code. Filing under the correct chapter of the bankruptcy code is very important to retaining as many assets as possible throughout the process. You may wish to consult with an attorney in order to determine which type of bankruptcy is right for you. The three most common types are:
    • Chapter 7. The most well known type of bankruptcy filing is a Chapter 7 bankruptcy. In a chapter 7, a debtor discharges all, or a large percentage of, his or her debt, and does not owe creditors any further payment. Assets of the debtor , which exceed his or her exemptions, are liquidated, or sold, in order the pay as much of the debt as possible. All debt, which exceeds the amount of payment provided by the liquidation of assets, is discharged. Both individuals and businesses may file for bankruptcy protection under Chapter 7;
    • Chapter 11. In a Chapter 11 bankruptcy, a debtor seeks an adjustment of his or her debts. This adjustment is accomplished either by reducing the amount of the debt or by extending the time the debtor has to repay it. A more comprehensive reorganization of debt may also be requested by a debtor and granted by the Court. Business debtors, including corporations, partnerships, and sole proprietorships, who prefer to remain in business and avoid liquidation, may wish to consider filing a petition under chapter 11 of the Bankruptcy Code; and
    • Chapter 13. A Chapter 13 bankruptcy is similar to a debt consolidation, with the debtor making monthly payments to the Trustee for a planned period of 3 to 5 years, and the Trustee managing payments to creditors over the plan period. At the end of the plan period, the debtor is discharged from any further obligation to the creditors paid under the plan. A non-business debtor who has regular income may wish to reorganize his or her debt under chapter 13 of the Bankruptcy Code. Sole proprietorships may also be eligible for relief under chapter 13.
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    Use your exemptions. A bankruptcy exemption is the amount of a specific type of property a person is allowed to keep in his or her bankruptcy. For example, during a personal Chapter 7 bankruptcy, a filer may have a $5,000 personal property exemption, meaning he or she may keep up to $5,000 in personal property, such as clothing, furniture, and household goods. The amount and type of exemptions available depends on your state’s laws. While federal law provides for certain exemptions, many state laws provide their own exemptions, which take the place of the federal ones. A few states allow debtors to choose between using the federal exemptions and the state’s exemptions. When choosing between the two you may wish to run the number both ways and simply choose the one that allows you to keep the most assets.
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    Reaffirm your business loans. During a Chapter 7 bankruptcy, a debtor may choose to reaffirm any loan or debt he or she wishes. Reaffirming a debt means agreeing to the Court not discharging you from the obligation to pay the debt and continuing to pay it according to the original terms. Generally, a debtor only reaffirms secured debts, or those, which have attached to property, such as a mortgage or a loan on a vehicle. While a debtor is free to reaffirm other types of debt, you should consult with a bankruptcy attorney before reaffirming any unsecured debt during a bankruptcy.


  • The best way to protect your assets during a bankruptcy, or any other legal proceeding, is to plan ahead. Asset protection planning experts such as tax, corporate, and estate-planning attorneys can assist you in developing a plan that will protect your assets no matter what legal or financial problems come your way.
  • If you are considering filing for bankruptcy protection without an attorney, visit the United State’s Federal Court webpage for pro se debtors for forms and helpful information at


  • The court may dismiss a Chapter 7 case filed by an individual whose debts are primarily consumer debts, rather than business debts, if the court finds that granting the petition would be an abuse of chapter 7.
  • You should consult with a licensed attorney before making any decision, such as filing for bankruptcy protection, which may affect your legal rights and obligations.
  • Corporations and partnerships are required by federal law to have an attorney to file a bankruptcy case.

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Categories: Bankruptcy