Understanding Bankruptcy Exemptions for Business Owners

This article focuses on an issue I came across on my Facebook page: How does filing for bankruptcy affect a person’s side business or small operation? This concern is particularly relevant to business owners exploring Chapter 7 bankruptcy and worried about protecting their personal and business assets. To what extent assets are protected depends on your state’s bankruptcy exemptions.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Updated on December 5, 2025.

Bankruptcy Business Exemptions

Bankruptcy exemptions are state-specific laws designed to protect a certain amount of a filer’s assets from being seized by the bankruptcy trustee. By knowing the exemptions in your state in advance, you can determine the extent to which your real and personal property is protected.

Professor’s Note: In today’s society, because of remote work, relocation has become simpler and more common. Because of that, if you plan on relocating, you should compare your current state’s exemption to your future state’s exemption to determine the best time to file for bankruptcy. You can read in more detail about the issue of exemptions and relocating in this prior article.

Real Property Example: Homestead Bankruptcy Exemption

Consider South Carolina’s homestead exemption of nearly $60,000 for a single filer. If a home is valued at $100,000 with a $75,000 mortgage, the equity is $25,000. Since the $60,000 exemption exceeds the $25,000 equity, the home is protected (exempt).

If there were no mortgage, $60,000 of equity would be protected, but the remaining $40,000 would belong to the bankruptcy estate. In that scenario, a Chapter 13 bankruptcy would likely be filed to repay that $40,000 over 36-60 months through a repayment plan.

Personal Property Exemptions

Exemptions apply to both real property and personal property. It is important to remember that personal property is valued at its fair market value, which I often call “garage sale value.” Essentially, how much would the item sell for on an online marketplace?

The Tools of the Trade Bankruptcy Business Exemption

Many states, including South Carolina, offer a specialized exemption known as “tools of the trade.”

In South Carolina, this exemption protects tools used in the operation of a business up to $1,825. (See South Carolina Code § 15-41-30(A)(6)).

The “tools of the trade” exemption is not available in all states. In states without this specific provision, business assets are usually covered under the general personal property exemptions.

Analyzing the Side Business in Chapter 7

Consider a common scenario: a high school teacher has just started a tutoring business. The business is primarily a service and has minimal or no tangible assets.

Asset Value: In a service-based business with no established client base or history, there is often no value to the business itself.

Physical Assets: The business may have no assets or tools that qualify for the specific “tools of the trade” exemption. If the computer was purchased with personal funds before the business was formally created, it would fall under general personal property exemptions, not the business exemption.

Bank Accounts: The primary potential asset would be any funds deposited into a dedicated business bank account. These funds must be analyzed against the state’s cash or wildcard exemptions.

Even if the business appears to have minimal value, it must still be listed on the bankruptcy petition. For a minimal-asset, service-based operation like this, the business entity itself is often protected (exempt) and not liquidated by the Chapter 7 trustee.

The Professor’s Takeaway

For small business owners considering bankruptcy, a thorough review of state-specific exemptions, including the tools of the trade exemption, is critical to protect their assets.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.

Updated initially on May 2, 2025.