Filing for Chapter 7 bankruptcy means liquidating your assets to generate money to pay down your debts, with remaining eligible debts discharged at the end of the bankruptcy case. However, state and federal law can protect some assets from liquidation in Chapter 7 bankruptcy. But what happens to business assets in a Chapter 7 case in Michigan?

The Basics of Chapter 7 Bankruptcy for Business Owners

Business owners may file for Chapter 7 bankruptcy to liquidate personal debts and, if they’ve structured their business as a sole proprietorship, business debts. Chapter 7 resolves debts by liquidating assets to repay creditors, as opposed to Chapter 11 or 13 bankruptcy, which allows a debtor to reorganize their debts and repay them over several years. When individual business owners file for Chapter 7, they can receive a fresh start by paying back some debts and receiving discharges for remaining balances. However, legal business entities like LLCs and corporations do not get a “fresh start” through Chapter 7 – instead, a business entity that files for Chapter 7 bankruptcy typically shuts down.

A business owner who wishes to file for Chapter 7 bankruptcy must meet the “means test,” which examines whether the debtor has the income and resources to pay back debts through reorganization.

What Happens to Business Assets in Michigan Chapter 7 Bankruptcies?

When a business entity files for Chapter 7 bankruptcy, it must liquidate all its assets, usually under the supervision of a bankruptcy trustee who assumes possession and control of the assets to sell them and use the proceeds to pay the business’s creditors. However, a business owner who personally owns tools, equipment, materials, or stock they use in business may keep some of those assets under statutory exemptions available to individuals who file for Chapter 7 bankruptcy. In Michigan, a person who files for Chapter 7 may choose between the list of exemptions under state or federal law, but they must choose one set or the other, and may not combine different exemptions from both lists.

Under Michigan’s bankruptcy exemptions, an individual can retain up to $3,075 in value of tools, implements, materials, stock, apparatus, and other items used to carry on the individual’s principal profession, trade, occupation, or business. An individual can also keep up to $3,075 in value of crops, farm animals, and fees for farm animals, as well as up to $800 in value of a computer and its accessories.

Under the federal bankruptcy exemptions, an individual can keep up to $3,175 of implements, professional books, or tools of the trade. Furthermore, federal law provides a “wildcard” exemption that allows an individual to exempt up to $1,675 of any property, plus property with an aggregate value of up to $15,800 of the unused portion of the individual’s homestead exemption.

Alternatives to Chapter 7 for Businesses

Businesses and business owners may pursue alternatives to Chapter 7 bankruptcy that can allow an enterprise to continue operating while resolving outstanding debts. Common alternatives include:

  • Filing for Chapter 11 (as a business entity) or Chapter 13 (as an individual) bankruptcy
  • Refinancing debts to reduce interest rates or extend loan durations to make payments more affordable
  • Restructuring debts by capitalizing interest, renegotiating interest rates, or obtaining partial forgiveness (which may have tax implications)

An experienced bankruptcy attorney can walk you or your business through alternatives to liquidation to help you make an informed decision about how to tackle your debt issues.

Contact a Bankruptcy Lawyer Today

When you file for bankruptcy, you may worry about what can happen to your business assets. Contact Marrs & Terry, PLLC, today for a confidential consultation with a knowledgeable bankruptcy attorney to learn what may happen to your business property when you file for Chapter 7 in Michigan.