Many people believe that bankruptcy requires surrendering everything you have so that it can be sold to pay your debts. While there is some truth to this belief, there are also exemptions that allow you to keep certain property. These exempt assets include equity in your home, your vehicle, and certain personal property.
If you are a business owner, your business may be your most valuable asset. However, unlike your personal assets, Pennsylvania bankruptcy law can make protecting business assets a challenge. Here’s what you need to know.
Understanding Bankruptcy
Businesses filing for bankruptcy in Pennsylvania typically choose to file either under Chapter 7 or Chapter 11 of the Bankruptcy Code. Chapter 7 bankruptcies are sometimes referred to as “liquidation” bankruptcies because the court trustee sells all of the debtor’s non-exempt assets and divides the proceeds amongst the debtor’s creditors.
Chapter 11 bankruptcies, by contrast, allow a business or individual to restructure their debts and pay them over time. Like a Chapter 7 bankruptcy, the court trustee can sell non-exempt assets in certain situations and distribute the proceeds to creditors.
Exempt assets cannot be sold by the court trustee under either type of bankruptcy. However, it falls to the debtor to identify assets that are exempt under the bankruptcy laws. In Pennsylvania, you can elect to use either the state law’s exemptions or those under the federal bankruptcy code, but you can’t combine the two lists.
Tools of the Trade Exemption
For businesses of all types, one of the most useful federal exemptions allows you to exempt up to $2,800 worth of “tools of the trade.” These are books, tools, and other instruments that you reasonably need to carry on your trade or business. For example, if you are a mechanic, you can exempt up to $2,800 of your tools.
There is no comparable “tools of the trade” exemption under Pennsylvania’s state exemptions. As a result, business owners who rely on specific tools and equipment may want to consider using federal exemptions when filing for bankruptcy.
Wildcard Exemption
Both state and federal bankruptcy laws allow debtors a “wildcard” exemption. This exemption entitles you to exempt any item of property, up to a certain limit. Pennsylvania’s state limit is $300, while the federal “wildcard” exemption limit is currently $1,475.
If you choose the federal exemptions but do not take a homestead exemption, then your “wildcard” exemption limit could increase to $15,425. This could be used to protect additional business assets.
Protecting Business Assets During the Bankruptcy Process
Navigating Pennsylvania’s bankruptcy laws can be complicated, even for individuals. But when a business is on the line, that complexity can increase dramatically — as can the stakes. Making an error when preparing your petition or overlooking key exemptions can seriously impact the future of your business.
Partnering with an experienced Pennsylvania commercial bankruptcy lawyer can ensure you maximize your exemptions and avoid costly mistakes.
