Bankruptcy is complex and integrating a business into and through the bankruptcy process warrants tremendous legal consideration.  Business income, inventory, goodwill, client lists, and other assets are not protected under bankruptcy exemptions.  However, these assets can be offset with the corporate liabilities, and the net value of the business can be used as a starting point in determining the Trustee’s interest in the existing business.  In addition, prior to filing the bankruptcy, a business owner can make decisions to liquidate portions of the business, or otherwise lower its net worth.  Any business planning should be done through legal counsel that is specifically experienced in this area.  Minimizing a business’s worth is a delicate balance of practical considerations versus fraudulent transfer and preferential payment issues.

One Arizona bankruptcy exemption which can be of use is the “tools of the trade” exemption, which allows each spouse to protect $2,500 worth of business tools.  This exemption is easy to misuse.  First, the exemption is only applicable to the debtor, i.e. not the business.  Therefore, if the business insures the tools and the taxes depreciate the assets in question, it will be difficult for the debtor to claim the exemption.  Another common issue is where the debtor inadvertently claims their occupation to be something that is inconsistent with the tools in question.  To avoid these issues, debtors should carefully examine their assets prior to filing, and when constructing a bankruptcy petition, it is important to make sure the information is consistent and congruent.

There are two other common mistakes made with filing a Chapter 7 bankruptcy and owning a business.  Perhaps the most common mistake is ending the business prior to filing bankruptcy, and then starting a new business after the bankruptcy is filed.  In theory, this concept makes sense and is often advised via a debtor’s attorney.  However, there is one often overlooked flaw.  The business assets, including computers and clients lists were transferred from the old business to the new business without value, which is technically a fraudulent transfer.  A second common mistake is not filing a motion to compel abandonment of property, when an actively run business is brought through the bankruptcy process.  By failing to file the motion, the Trustee can make the assertion that all business income earned after filing becomes property of the bankruptcy estate.  This creates terrible leverage for a debtor’s attorney to negotiate a settlement.

At Hastings & Hastings, our managing bankruptcy attorney personally handles all business cases and has successfully navigated business debtors through the Chapter 7 and Chapter 13 bankruptcy process.  In a Chapter 7 bankruptcy, only the individual is eligible for a discharge, not the business.  In a Chapter 13, a corporation or partnership is ineligible to file.  However, the business owner may file if otherwise eligible.