What Happens to Your Business After a Personal Bankruptcy?

Do You Have to Shut Down your Business After Personal Bankruptcy?

If you file for a Chapter 7 bankruptcy, you may have to shut your business down. What happens to your business after personal bankruptcy is largely dictated by the structure of the company. If your are part owner of a corporation or Limited Liability company you may be able to stay operational even though you are personally liable for some of the business debt.

Individual Owner or Sole Proprietorship

If you are a sole proprietor and have filed for bankruptcy, the trustee may ask you to close business while the he or she assesses the business status. The trustee will asses your business assets and check the sale value.  This process may take a few months or more.  This prevents the business from possibly accumulating more debt from regular operations and prevent potential further claims during the bankruptcy case. If your business has no assets, and is service based, you may be allowed to stay open. The chances of you accumulating more debt or incurring any legal liability are small.  However, even small businesses may be shut down if the business has a lot of payments due.  The trustee could collect these funds due to you that have not be collected yet. These outstanding commissions will become part of your bankruptcy estate when they are received.  All funds generated by business operations while under bankruptcy become part of the bankruptcy estate.

Corporations and Limited Liability Companies(Multi-Member)

If you are a partner in a corporation or a member in a multi-member limited liability company, your share of the business will become part of your bankruptcy estate. Most states prohibit the trustee from interfering with the  partnership or limited liability company or taking their assets unless you are a majority owner.

A charging order can be obtained by the creditor or bankruptcy trustee against the debtor owner’s interest in the business. This allows the creditor or the trustee to receive profits that would usually be paid to the owner of the interest.   This charging order may be of little help to the creditor or trustee if the partnership or limited liability company does not distribute profits to its members regularly.  Only the economic right to receive income is taken over by the trustee. The trustee is not prohibited to manage or vote in the partnership or limited liability company or assume other membership rights that were granted to owners under the partnership or limited liability company agreement.  The trustee can assign or sell the economic right to someone else but cannot transfer or sell your share in the partnership or limited liability company.

You may need to sell your share of the partnership or limited liability company before you file for bankruptcy.

Corporations and Limited liability Companies (single member)

The bankruptcy trustee may take over your shares or membership interest in the partnership or limited liability company and can vote to liquidate or sell the business to pay creditors if you are the sole or majority owner.

Your business may not be affected if you own a viable corporation with members by your personal bankruptcy.  

If you are considering filing bankruptcy and are concerned  what happens to your business after personal bankruptcy, speak to our experienced business debt relief lawyers today. We have assisted many small business owners file personal bankruptcy. Schedule your free initial consultation today.