Can I Keep My Small Business if I File for Chapter 7 or Chapter 13 Bankruptcy in Arizona?
If you’re a sole proprietor or you own an LLC, you might be able to keep your business when you file for Chapter 7 or Chapter 13 bankruptcy. But there are complicated factors that must be considered, including your business structure, the chapter of bankruptcy you file under, and the value of your business assets.
Cy Hainey is a trusted Phoenix bankruptcy lawyer. When you meet with us for a free consultation, Cy will go over your options for structuring a bankruptcy agreement that allows you to keep your business.
Sole Proprietorship vs. LLC in Bankruptcy
Before diving into bankruptcy options, it’s important to define your business type. Most small businesses fall into one of two categories, sole proprietorship or LLC.
Sole Proprietor
A sole proprietorship is not a separate legal entity. That means there’s no legal distinction between you and your business. All of the business’s debts and assets are your personal debts and assets.
If you file for personal bankruptcy, your business is automatically part of the bankruptcy estate. Your tools, equipment, inventory, receivables, and even your business name could be up for review.
Limited Liability Company (LLC)
An LLC is a legally distinct entity. It can own property, sign contracts, and carry debt in its own name. If you file for personal bankruptcy but your LLC is financially sound and separate from your personal obligations, it could remain unaffected.
However, if your personal bankruptcy trustee sees value in your ownership interest in the LLC, or if your LLC is an extension of your personal work, it may be impacted.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a liquidation process that discharges most unsecured debts (like credit cards, medical bills, or personal loans). Certain assets are exempt from liquidation, such as retirement accounts. There are limited exemptions for your home, vehicle, and household goods.
Chapter 7 and Sole Proprietors
As a sole proprietor, your business assets are considered personal assets. This includes:
- Equipment
- Inventory
- Tools of the trade
- Business bank accounts
- Business name and goodwill
In Arizona, you are allowed certain exemptions under state law that can help you protect these assets. For example, Arizona Exemption: A.R.S. § 33-1126(A)(6) allows up to $5,000 in value for “tools, equipment, instruments and books” used in your trade. If you’re married and filing jointly, that amount doubles to $10,000. It’s important to remember that the trustee in a Chapter 7 bankruptcy can force the liquidation of business assets that exceed these limits.
If your business relies on a limited amount of assets valued under the exemption cap, you may be able to keep operating during and after bankruptcy. This could include property such as a laptop, a printer, a small inventory, and some tools.
LLC Owners and Chapter 7
If your LLC has value, your ownership interest is considered an asset. The trustee may decide to:
- Sell your membership interest in the LLC
- Liquidate LLC assets if you are the sole owner of the LLC
- Request that you dissolve or cease business operations if the LLC is not compliant with Arizona laws
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a reorganization plan that allows you to pay off debts over 3 to 5 years, based on your income and assets. Unlike Chapter 7, Chapter 13 does not involve liquidating your assets.
Why Chapter 13 Is Often Better for Business Owners
- You keep your property, including business assets.
- A trustee won’t sell your tools, equipment, or inventory.
- You can continue running your business while repaying personal debts.
- You can propose a plan that includes tax debts, overdue mortgage payments, and even past-due business obligations.
Chapter 13 is particularly helpful for sole proprietors whose income is tied to their business operations. It lets you address personal debts while maintaining cash flow from your company.
For LLC owners, Chapter 13 can protect your ownership interest and allow you to stabilize your finances without risking business closure.
A Real-Life Scenario
Chapter 13 bankruptcy is often better suited for those looking to keep your business. Let’s say you’re a self-employed mechanic in Phoenix with $50,000 in credit card debt, some overdue medical bills, and a shop full of tools worth around $7,000.
If you file for Chapter 7 bankruptcy, the trustee could sell off tools that exceed the $5,000 exemption, unless you’re able to argue that they have depreciated value.
On the other hand, under Chapter 13 you’d be able to keep your tools, continue working, and repay your debt over time. The plan would factor in your income and expenses, making it easier to maintain stability.
Key Tips for Arizona Entrepreneurs Filing Bankruptcy
- Assess the Value of Your Business Assets
Work with a Phoenix bankruptcy attorney to get accurate valuations. This is crucial for understanding whether you fall under Arizona’s exemption laws. - Don’t Hide Assets
It may be tempting to move equipment into someone else’s name or delay invoicing clients, but doing so could be considered fraud. Transparency protects you legally and strategically. - Evaluate Chapter 13 for Flexibility
If your business is central to your income, Chapter 13 can offer more breathing room without threatening liquidation. - Speak With a Phoenix Bankruptcy Attorney Early
The earlier you seek help, the more options you have. Waiting until garnishments or lawsuits start can limit your ability to protect your business.
Protecting Your Business in Bankruptcy Starts with the Right Legal Strategy
At Hilltop Law Firm, we’ve helped several small business owners develop bankruptcy plans that reduce or eliminate personal debt without sacrificing their businesses.
We can help you find the right strategy to:
- Evaluate the risks of Chapter 7 vs. Chapter 13
- Understand how business assets in bankruptcy are treated
- Maximize exemptions under Chapter 7
- Keep your essential tools and income stream intact
- File properly and avoid missteps that could jeopardize your business
Speak With an Experienced Bankruptcy Lawyer in Phoenix
Filing for bankruptcy doesn’t have to be the end of the world. With the right legal support, you may be able to keep your business and create a stronger financial foundation.
Contact Hilltop Law Firm today at (602) 466-9631 to schedule a free consultation.