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What Assets are Protected in Small Business Bankruptcy?


What Assets are Protected in Small Business Bankruptcy?

Filing for bankruptcy can be scary for small business owners. You’ve worked so hard to build your business, and now you have to give up control and put your company’s fate in the hands of the court. It’s natural to worry about losing everything.

But bankruptcy doesn’t have to mean the end of your business or financial ruin. The bankruptcy code actually protects many assets for small business owners. With the right bankruptcy strategy, you can discharge debt, keep operating, and preserve your personal wealth.

This article will explain exactly what assets are protected in small business bankruptcy. We’ll look at how it works for sole proprietors, partnerships, LLCs, and corporations. My goal is to make you feel more confident and in control if you’re considering business bankruptcy.

Sole Proprietorships

If you’re a sole proprietor, your business assets and personal assets are one and the same. There is no legal separation between you and your business.

That means if your business goes bankrupt, your personal belongings are at risk. Creditors can seize your house, car, retirement accounts, and other assets to pay off business debts.

Luckily, federal and state bankruptcy exemptions protect many personal assets in bankruptcy. Exemptions allow you to keep a certain amount of assets protected.

Here are some of the most common bankruptcy exemptions for sole proprietors:

  • Homestead exemption – Lets you protect equity in your primary residence up to a certain amount, which varies by state. For example, it’s $25,150 in Florida and $600,000 in California.
  • Vehicle exemption – Allows protecting one or more vehicles up to a certain value. For example, you can exempt $1,000 in Ohio and $15,000 in Texas.
  • Personal property exemption – Covers household goods, furniture, appliances, clothes, etc. The amounts range from $500 to $15,000 depending on your state.
  • Tools of trade exemption – Protects specialized equipment you use to earn income, up to a few thousand dollars depending on the state.
  • Retirement accounts – Most 401(k)s, IRAs, pensions, and other retirement accounts are protected in bankruptcy.
  • Life insurance policies with cash value – The cash value portion is usually exempt with no limit.

The exemptions available to you will depend on whether you file Chapter 7 or Chapter 13 bankruptcy. Chapter 7 allows using both federal and state exemptions for the fullest protection. Chapter 13 only permits state exemptions, but you get to keep all your assets if you complete a 3-5 year repayment plan.

Talk to a bankruptcy attorney to understand exactly which exemptions apply in your situation. The right strategy can help protect your house, car, retirement accounts, and other essential assets.

Partnerships & LLCs

Partnerships and LLCs are separate legal entities from their owners. That means the business assets belong to the company, while your personal assets belong to you.

However, partnerships and LLCs don’t receive a discharge of debts in bankruptcy like individuals do. The business still has to pay its creditors, even if it files for bankruptcy.

In addition, the “corporate veil” between business and personal assets is pierced quite easily. If a court decides you mingled personal and business funds or failed to follow corporate formalities, your personal wealth can be pursued.

That’s why it’s so important for partners and LLC members to protect their personal assets when the business struggles:

  • File personal bankruptcy – This discharges your personal guarantee debts with no impact on business assets.
  • Avoid commingling funds – Never mix business and personal expenses. Have separate bank accounts.
  • Follow formalities – Hold meetings, keep minutes, file annual reports, and document decisions.
  • Get liability insurance – Insure yourself against negligence, malpractice, and other claims.
  • Shelter assets – Put personal assets not needed for business in trusts or other entities for protection.

With the right setup, partners and LLC members can discharge their personal debts while continuing to operate the still-liable business. Meet with an attorney to discuss strategies to protect your personal wealth.


Corporations have the strongest separation between business and personal assets. Shareholders are not personally responsible for corporate debts and liabilities.

However, the corporate veil can still be pierced if formalities aren’t followed. And shareholders who personally guarantee debts can be pursued despite the corporate structure.

Here are some tips for corporate shareholders to protect personal assets:

  • File personal bankruptcy to discharge guaranteed debts
  • Correctly capitalize and operate the corporation
  • Hold shareholder and director meetings
  • Keep corporate records and documents
  • Have a separate corporate bank account
  • Avoid commingling personal and corporate funds
  • Shelter personal assets like real estate in other entities

Corporate bankruptcy is very different than personal bankruptcy. Chapter 11 bankruptcy allows reorganizing the corporation’s debts and continuing operations. An experienced business bankruptcy lawyer can help shareholders preserve their personal wealth while guiding the corporation through bankruptcy.

The Bottom Line

Small business bankruptcy does not necessarily mean losing everything you’ve worked for. In fact, it can be an effective tool to save a struggling business while protecting personal assets.

The keys are understanding what exemptions apply to you, following corporate formalities, sheltering personal assets properly, and filing the right type of personal or business bankruptcy. Meet with a legal professional to discuss the optimal strategies for your situation.

With the right preparation, you can discharge debts, continue operating, and preserve your financial security. Don’t let fear of the unknown stop you from exploring your bankruptcy options. Knowledge is power, so learn how the system can work for you.

Now you understand exactly what assets are protected in small business bankruptcy. I know you’ll make the best choices to take control of your financial future.


[1] How Small Businesses Owners Can Protect Their Personal Assets from Business Debt

[2] Bankruptcy Options for Small Business Owners

[3] Chapter 11 Bankruptcy Basics

[4] Small Businesses & Bankruptcy: How to File & What to Know

[5] Chapter 7 for Small Business Owners: An Overview

[6] Asset Protection for the Business Owner


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Our team is available always to help you. Regardless of whether you need advice, or just want to run a scenario by us. We take pride in the fact our team loves working with our clients - and truly cares about their financial and mental wellbeing.

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