Small Business and Bankruptcy

If I file bankruptcy, how will it affect a small business checking account in my name?

Today many people have more than one job, possibly working full time for an employer in an office job, as a teacher, or in another profession while running a direct selling business on the side such as Avon, Scentsy, or Mary Kay. Recently on our bankruptcy forum we had a user ask how her small business funds would be treated during a bankruptcy.

Many who have a direct selling business may set up a separate checking account for the business.  A separate account is mainly used in such a small business to help keep the business funds separate from those used for personal matters.  Usually this separate checking account is still in the individual’s name, because there is little benefit to formally creating a Limited Liability Company (LLC) or Limited Partnership (LP) for a small direct selling.

But if the individual has to declare bankruptcy for personal reasons such as loss of the primary job, medical bills, or bad investments, what happens to the small business checking account?

Because the checking account is in the individual’s name, the checking account and the funds in it will be included in the bankruptcy.  Even though the individual may consider the funds in the business’ checking account as those of their customers or the business, they are an asset in the individual’s name.  Therefore, whether the individual is considering filing Chapter 7 or Chapter 13 bankruptcy, the individual needs to be sure to declare the small business checking account in the bankruptcy forms, as the checking account is an asset with value.

However, each state has a list of assets that are exempt from bankruptcy.  These exemptions are certain assets up to a predetermined value that cannot be taken in a bankruptcy.  Bank accounts are generally one of these exempt assets, but the amount that is exempt and the exact nature of the exemption will vary from state to state.

But also keep in mind that even though funds in a bank account may be exempt from a bankruptcy trustee or court, if the individual owes other money to the bank that will be discharged in the bankruptcy, the bank may still seize or close the bank account to use those funds to repay the money owed.

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Beth L. is a content writer for Better Bankruptcy. Good content and information is one of many methods we utilize to bring you the answers you need.