Bankruptcy is a legal procedure that relieves a debtor of all or some the debts s/he owes. Chapter 7 bankruptcy is a liquidation process that sells off eligible real assets and disburses the proceeds to repay the creditors. Generally, the debtor is discharged after the settlement of creditors. After the bankruptcy discharge, the debtor has no legal responsibility for his/her debts settled.
In the case of an unincorporated business structure such as sole proprietorship or general partnership, the business and the owner are considered the same entity and as such, are liable for the debts of one another.
In a Chapter 7 bankruptcy, the debtor can exempt certain real property up to a certain value. This ceiling varies state to state and some states follow the federal bankruptcy exceptions. If a business asset falls within the applicable exemption, the debtor can claim it as an exempted property and retain the real property. There are some general types of exemptions that protect the business assets of a debtor. They are:
- Tools of the trade: If the debtor’s trade requires specialized tools, the federal bankruptcy exceptions and certain state bankruptcy laws permits to retain such tools of the trade with the debtor. According to the federal exemptions, the debtor can claim up to $2,175 in tools of the trade or professional books. Usually, in certain circumstances an appraisal is conducted to determine the cost of such tools and professional equipments or books. Moreover, certain states provide higher exemption above the federal exemption amount.
- Wildcard exemption: Most exemptions in Chapter 7 bankruptcy are specific to a type of real property and that can only be used to protect such category assets. However, the wildcard exemption allows the debtor to exempt any type of real property in business.
A Chapter 7 bankruptcy may be a great way for owners of small businesses who have invested almost all of their own funds into the small business. Chapter 7 liquidation wipes out all of the business debts of a small business and this may help the debtor get a “fresh start”.