I Filed a Chapter 7. Why Did the Trustee Take My Business?

I lost my business when I filed bankruptcy – why? There are very strict rules dictating how the process of bankruptcy works.

The bankruptcy trustee must take specific actions in order to protect the bankruptcy estate and deal with (administrate) any non-exempt property; this includes taking your non-exempt business.

Many people assume that their business will not be affected when they file bankruptcy.  They may be very wrong in that assumption.  Why?  The answer is “it depends on the type of bankruptcy filed”.  Most individuals file a chapter 7 bankruptcy.

In a chapter 7 the individual cannot keep their business, assuming it has any value.  Instead, it will be sold by the bankruptcy trustee and the funds paid to the creditors.   Even if the business is valueless the creditors still have a potential claim.  Also, the individual needs to consider how to protect future profits before continuing to operate the business.

IMPORTANT TO KNOW: You cannot operate your business when in a chapter 7 without permisson from the trustee and only after approval by the bankruptcy court.

For example: In re NAKHUDA, ) Bk. No. 14-41156 , BAP No. NC-14-1235-TaPaJu (9th Cir, 3/2/15).  In this case the Debtor disputed that a chapter 7 debtor, as matter of law, must shut down a business and turn it over to the trustee upon filing for bankruptcy.  The Debtor asserted that the Code is not so “black or white”.  Unfortunately the 9th Circuit Court of Appeals disagreed with the Debtor.

You may lose your business if you filed a chapter 7

          “A chapter 7 debtor is required by statute to cease operation of a business upon filing for bankruptcy. First, as discussed in more detail below, a debtor has the affirmative duty to surrender all estate property and records to the chapter 7 trustee. See 11 U.S.C. § 521(a)(4). Unauthorized continuing operation of a chapter 7 debtor-owned business and retention of control over its assets is absolutely inconsistent with this statutory mandate. Further, the Code also makes clear that continued operation, if allowed at all, can only occur by (or in cooperation with) the chapter 7 trustee and only after approval by the bankruptcy court. See 11 U.S.C. § 721 (“The court may authorize the trustee to operate the business of the debtor for a limited period, if such operation is in the best interest of the estate and consistent with the orderly liquidation of the estate.”) (emphasis added). Thus, “[u]nlike in a chapter 11 case, where the Code expressly authorizes the debtor to continue to operate its business, in a chapter 7 case, the bankruptcy court can authorize only the trustee, and not the debtor, to operate the debtor’s business pursuant to section 721.” 6 Collier on Bankruptcy ¶ 721.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2012) (emphasis added). ”

THE MORAL: never file for bankruptcy without first talking to a very experienced bankruptcy attorney. 

Also, do not use any company, lawyer or document preparer who advertises their fees in an attempt to offer the “lowest price possible“.  Document preparers are not allowed to give you any legal advice, that includes correcting your misconceptions about how the bankruptcy may affect you or your property.  Also, law firms who advertise on TV, billboard or the Internet must pay for that advertising.  Most of them do this by treating their clients like cattle – mass producing milk at the lowest rate possible.  They also do this by not providing quality legal advice tailored to the specifics of the individual.  Be very careful or you may have a very nasty surprise waiting.

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MUSINGS BY DIANE:

Below are some videos that might answer some questions, including “Why Do I Offer Free Legal Advice”.  My hope is that you actively seek expert bankruptcy counsel before jumping off the cliff into the bankruptcy.  You cannot stop half-way through the plunge and reverse your momentum (unless you are in the movies).