What Happens to My Business If I File Bankruptcy in Utah?

Filing personal bankruptcy does not automatically mean you lose or close your business. What happens depends heavily on how the business is organized, what it owns, what it is worth, whether you personally owe its debts, and whether you file Chapter 7 or Chapter 13.

For a Utah business owner, one of the first questions I ask is: Are you a sole proprietor, or does the business operate through an LLC or corporation? That distinction can substantially change the bankruptcy analysis.

What happens to a sole proprietorship in Chapter 7?

If you operate as a sole proprietor, there is generally no separate legal entity between you and the business for bankruptcy purposes. The business assets are your assets, and business debts for which you are liable are your debts.

When an individual files Chapter 7, the bankruptcy estate generally includes the debtor’s legal and equitable interests in property at the time of filing. That can include business equipment, inventory, accounts receivable, cash, intellectual property, and other business assets. Federal bankruptcy law defines property of the estate broadly. See 11 U.S.C. § 541.

That does not automatically mean the trustee will shut down the business or sell everything.

The practical questions are usually:

• What does the business actually own?
• What are those assets worth?
• Are there liens against them?
• Are applicable exemptions available?
• Would selling the assets produce meaningful money for creditors after liens, exemptions, and costs?

A landscaping business with an older truck and ordinary tools presents a very different Chapter 7 problem from a profitable business owning expensive unencumbered equipment.

What if my business is an LLC or corporation?

An LLC or corporation is different because the company generally owns its own assets.

If you personally file Chapter 7, your ownership interest in the company may become property of your bankruptcy estate. That does not necessarily mean every asset owned by the company becomes your personal bankruptcy property.

But that distinction does not make the business irrelevant.

A Chapter 7 trustee can examine what your ownership interest is worth. A profitable company with valuable assets, cash, receivables, or transferable goodwill may make your ownership interest valuable even though those assets technically belong to the company.

For a closely held business, the operating agreement, ownership percentages, other owners, restrictions on transfer, liabilities, income, assets, and realistic market value can all matter.

This is one area where telling a bankruptcy attorney, “It’s in the LLC’s name, not mine,” does not finish the analysis.

Can I keep operating my business after filing Chapter 7?

Sometimes, yes. But Chapter 7 requires particular care when an active business is involved.

A trustee’s responsibility is to administer nonexempt property for creditors. If the debtor owns a business interest with substantial nonexempt value, the trustee may investigate whether that interest can be sold or otherwise administered.

An individual debtor also has significant disclosure and recordkeeping obligations. Section 727 of the Bankruptcy Code allows denial of a Chapter 7 discharge in certain circumstances involving inadequate business or financial records, unexplained loss of assets, concealment, or false statements.

For that reason, business owners considering Chapter 7 should have reasonably complete records showing things such as business income, expenses, accounts, assets, debts, transfers, and tax information.

A cash-based business with poor records can create a much more difficult bankruptcy than a business with straightforward books.

What happens to business debt when I file personal bankruptcy?

It depends on who actually owes the debt.

If you are a sole proprietor, business debts are commonly your personal obligations.

If an LLC or corporation borrowed the money, the company may be primarily responsible. But many small-business lenders, landlords, equipment financiers, and credit-card issuers require the owner to sign a personal guarantee.

If you personally guaranteed a business obligation, your personal bankruptcy may address your liability on that guarantee even though the company remains liable.

This distinction becomes particularly important when a business has failed.

Closing an LLC does not necessarily eliminate an owner’s personal guarantees.

What if my business already closed?

A failed business is one of the more common reasons people end up considering bankruptcy.

If the business has already closed, I generally want to know:

What happened to the assets?

If equipment was sold, where did the money go? If inventory disappeared, was it sold, returned, abandoned, or used? Were business vehicles transferred? Did an owner repay money owed to family members or themselves? Are accounts receivable still collectible?

Bankruptcy law does not require a business to have succeeded. But a trustee may reasonably want to understand what happened to assets that existed before the bankruptcy was filed.

Good records make that much easier.

Is Chapter 13 better for someone who owns a business?

It can be.

Chapter 13 is available to qualifying individuals with regular income, including self-employed individuals. The Bankruptcy Code defines an “individual with regular income” by whether income is sufficiently stable and regular to make payments under a Chapter 13 plan. See 11 U.S.C. § 101(30).

Unlike Chapter 7, Chapter 13 generally allows the debtor to retain property while making payments under a court-approved plan.

That can make Chapter 13 particularly useful when a viable business has value that could create a problem in Chapter 7 but the owner wants to continue operating it.

The tradeoff is that business income, expenses, value, debts, and cash flow may become important in determining whether a proposed Chapter 13 plan is feasible and what creditors must receive.

For more information, see Alta Legal’s guides to Chapter 7 bankruptcy in Utah and Chapter 13 bankruptcy in Utah.

Can my LLC itself file Chapter 7?

An LLC or corporation can potentially be a Chapter 7 debtor, but there is a major difference from an individual Chapter 7: a corporation or LLC does not receive a Chapter 7 discharge.

Section 727(a)(1) limits a Chapter 7 discharge to an individual debtor.

A business Chapter 7 therefore functions primarily as a liquidation process. Whether putting the company itself into bankruptcy makes sense is a separate question from whether the owner should file personal bankruptcy.

For many small-business owners, the more important issue is actually the owner’s personal guarantees and personal liability after the business fails.

Should I transfer my business before filing bankruptcy?

Do not transfer a business, equipment, vehicles, cash, or other assets simply to keep them away from a bankruptcy trustee.

Transfers before bankruptcy must often be disclosed and can create much larger problems than the asset itself would have created.

If a business is being sold or transferred for a legitimate reason, have the transaction reviewed before filing bankruptcy. The price, timing, relationship between the parties, and what happens to the sale proceeds can all matter.

What should I bring to a bankruptcy consultation if I own a business?

You do not need perfect accounting records before speaking with an attorney. But it helps to bring or have access to:

• recent business bank statements;
• recent tax returns;
• a basic list of business assets and approximate values;
• outstanding business loans and credit cards;
• leases and major contracts;
• information about personal guarantees;
• ownership documents for an LLC or corporation; and
• information about significant recent sales, transfers, or payments.

The goal is to determine what the business is actually worth and what risks exist before the bankruptcy is filed.

The bottom line

Owning a business does not disqualify you from bankruptcy, and filing bankruptcy does not automatically mean losing your business.

But business ownership makes pre-filing analysis especially important.

A sole proprietorship, a one-person LLC with no real assets, and a profitable corporation with employees and valuable equipment may all require very different strategies.

If you own a Utah business—or recently closed one—and are considering bankruptcy, Alta Legal can review the business assets, debts, personal guarantees, income, and ownership structure before you decide whether bankruptcy is right for you.

Schedule a free consultation with Alta Legal or call 385-224-3765 to discuss your situation with a Utah bankruptcy attorney.

Disclaimer

This information is provided for general informational purposes only and is not legal advice. Reading this article does not create an attorney-client relationship. You should consult a qualified attorney before making important legal or financial decisions based on your individual circumstances.