How Can You file a Chapter 7 Bankruptcy and Keep Your Small Business?

Well, you can't. It's absolutely impossible.

Except when you can.

I'm going to write about this topic and start with the very smallest and simplest business, and work up to more complex and larger businesses.

Our first example in this topic area is the haircutter/dog groomer. Same business, different species. But we'll stick with the haircutter to keep it simple.

She's cut hair in a tiny little place that is her pride and joy; she came here from a different country, and loves having the freedom to own a business, which she didn't have back in East Mumbledy-mumble. The government there was too big, and had too many regulations to make it possible for an ordinary person to open a business and thrive.

Like many legal immigrants from East Mumbledy-mumble, she's willing to work sixteen hour days, nine days a week, because that was common in the state run factory that was formerly her boss back in the old country.

She's had a ten-year great run cutting hair, and now she's hit a rough spot on the pavement. And that's for three reasons.

One is that she doesn't know how to advertise on the internet, so she's invisible to customers. But she still has almost all her old customers, because she does such good work.

One is that her customers, one and all, are also affected by the economic depression currently gripping the United States. Therefore, while she's lost very few customers, they now come in for cuts only every other month, rather than every month.

For the numerically challenged, that means that her gross income has been cut in HALF, through no fault of her own; BUT HER OVERHEAD IS THE SAME AS IT WAS BEFORE THE INCOME WAS CUT IN HALF.

The final reason that her income is down is simple, brute competition. There are now haircutters who'll work for very little indeed, just to keep their doors open.

So how does she get to dump the debt and keep the business?

Watch!

First, the business sort of exists, and sort of doesn't, depending on your perspective.

She didn't incorporate her business. It's a dba ("doing business as...").

Therefore the physical plant, her chairs, and her clippers, and her stuff, all belongs to her, rather than to some other legal entity, like a corporation.

Here in Arizona, there's a "tools of the trade" exemption. It's only $2,500 or so, but we can aggregate her tools of the trade exemption with her husband's (he brings in no money, and cooks well and keeps the house clean. That's to keep the example simple).

And the tools are going to be valued at replacement value, and since they're all old and used, and used tools are a drug on the market right now, all of her stuff (clippers, brooms, bins, half-empty hair spray cans, mirrors, combs, and so on) are going to be exempt, or worthless, which is almost as good.

Now, you'd think that just filing for her would be good enough. But no. Because the trustee in her case will quite reasonably ask about the good-will value of her tiny business if it's open on the day that she files a Chapter 7, and the trustee will attempt to obtain payment from her to buy back her own tiny business, where she works many hours a day, on her feet, with no help. Because a going concern has value over and above it's asset value.

Fact.

So she closes the business, because under the best of all possible worlds, she would not have money to "buy back" her own business, nor would she even be able to survive the process of evaluation of the value, or fight with the trustee's very smart and aggressive lawyer when he or she decides on a value that the trustee DEMANDS.

Because if the debtor doesn't cough up the dough, the trustee, as a fiduciary, must sell the business, along with the client list, minus the tools of the trade.

Fact.

But now there's no business. Our heroine has decided that she needs a mental health break, because she's close to a breakdown because of creditor phone calls and letters and threats, so she closes her business.

Now she inventories her tools and all her other assets, and she lists her debts.

Now she files her bankruptcy.

And then she rents a much smaller, much nicer place down the street. For no money down. Because this is a depression.

And she puts up a sign with a different name for the business, because the old name is property of the bankruptcy estate (although it has exactly zero value).

And she has a new telephone number, because the old telephone number was property of the bankruptcy estate.

And she lets her old clients know about the new place by sending them invitations to her not-so-grand opening of the brand NEW business, and she'll also tell them about it when she goes to her five Church services on Sunday, at five different churches, because she may not know how to market using the internet, but she sure knows how to shake hands at the pancake breakfast!

And now she's back cutting hair, minus a lot of debt, and has kept everything she wanted to keep.

And my next discussion of the topic will be the same haircutter, plus the complication of a pre-existing corporate shell drenched in debt.

Stay tuned!