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What Is the Value of a Small Business in Bankruptcy?

What Is the Value of a Small Business in Chapter 7 or Chapter 13 Bankruptcy?

 

The Value of a Small Business in Bankruptcy: Assets v. Liabilities

A business owned by an individual filing for bankruptcy is property that must be valued, listed, and exempted (protected) in the bankruptcy the same as any other piece of property owned by that individual. If the business is incorporated, it is a separate legal entity that may or may not be filing bankruptcy along with its owner's personal bankruptcy, but, regardless, it is an item of some potential value that must be accounted for as an aggregate concern in the individual's personal bankruptcy. In other words, it is an asset owned by the bankruptcy filer, just like a car or a wrist-watch. Depending upon the type of business, its size, its assets, its liabilities, its corporate form, and especially depending upon whether the individual operating would like to continue the business' operation or just shut it down, business ownership in bankruptcy can be problematic. This is particularly true in a Chapter 7 context. In a Chapter 7 bankruptcy, the Trustee assigned to a case by the court has the duty to seize and liquidate all unprotected (non-exempt) assets of the filing individual. With regard to the Federal exemptions available to protect property, a fairly low exemption of just over $11,000 must cover bank account balances under the Federal bankruptcy exemption scheme (Michigan has separate exemptions which may be elected but which are not necessarily more favorable in this regard), expected or received tax refunds, stocks that are not in a qualified retirement plan, and miscellaneous personal property from guns to comic book collections to ... businesses. This is obviously not a lot of money to go around, and, given that the Trustee otherwise has the right to operate or liquidate a business (or to write resolutions on behalf of the corporation, etc.) owned by a filing debtor, a business that is a going concern is very often a good reason to look to a Chapter 13 rather than a Chapter 7, as personal property is not seized or liquidated in a Chapter 13 bankruptcy. In either case, however, it is important to properly value the business. For a small, personal service-based business, the value of the business without the individual running it (i.e., after Trustee has seized the business) may be very low or even nothing at all. A business which does have assets should carefully draft a balance sheet listing those assets against any business debts owed. Depreciation and other tax-related terms of art or valuation should not be used; the same liquidation- or "garage sale"-level of value for individual assets of other sorts in bankruptcy is the proper valuation. Thus, for example, the value of a small business in bankruptcy which has assets of $5,000 and owes $2,500 may be approximately $2,500 as a singular asset of the bankruptcy estate. Depending upon the other personal assets of the individual filing the bankruptcy, this $2,500 may be easy to protect. When the value rises higher, it may be that the value is impossible to protect and a Chapter 13 will be required to allow the individual to operate the business going forward from the bankruptcy.

The Value of a Small Business in Bankruptcy: Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, as mentioned, no assets are seized and liquidated. However, the value of non-exempt assets, business or otherwise, can affect the size of the monthly Chapter 13 plan payment. Additionally, if the business is losing money on an average monthly basis and not earning money, continuing to run a business which is detracting from the net monthly income available to make the Chapter 13 plan payment rather than adding to it may be problematic in terms of getting the plan confirmed (approved) by the Bankruptcy Court. However, the value of a small business in bankruptcy in a Chapter 13 context is as important as in a Chapter 7 context for a primary reason additional to the question of profitability and Chapter 13 plan payment size: a Chapter 13 may be converted after filing to a Chapter 7 if income or expenses increase or decrease to the point of rendering the Chapter 13 infeasible as a continuing process. If conversion to Chapter 7 is elected before the Chapter 13 is completed, a Chapter 7 Trustee will step into the converted case to, again, "administer" or liquidate assets where non-exempt.

The Value of a Small Business in Bankruptcy: The Bottom-Line

The bottom-line is that no business owner seeking relief from personal or business debt should consider either a Chapter 7 or Chapter 13 bankruptcy without the assistance of an experienced bankruptcy lawyer assisting them if their intent is to continue operating the business during or after the bankruptcy proceeding. "Going it alone" for the sake of saving money on attorney's fees in that circumstance could mean a total loss of livelihood. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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