Tools of the Trade: Protect Bankruptcy Assets

Hey, everybody. Today, I’m answering a question from Nate from South Carolina. First things first, Nate, congrats on starting your business! He has a tutoring business that he started on the side, but he’s concerned about how it might be affected by bankruptcy. That’s when it’s important to know if your state has business bankruptcy exemptions. In this case, South Carolina does, and that is known as the tools of the trade exemption.

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Key Points:

• Nate lives in South Carolina and started a tutoring business.
• A personal bankruptcy can affect a business, so it’s key to know the exemptions offered in your state.
• South Carolina has a “tools of the trade” exemption for business-related assets. This exemption helps protect businesses.

How Bankruptcy Exemptions Work

Well, it’s very simple. We have to go back to what exemptions mean. Remember, exemptions are protections for your assets, and the extent of these protections will determine what happens with your bankruptcy case. Let’s do some quick math to figure this out.

Let’s say your car is worth $15,000, and you owe $5,000. What do you have in equity? You have $10,000. Now, exemptions vary per state, but let’s suppose that in your state, the exemption limit is $1,000. With $10,000 in equity and $1,000 protected, that means that $9,000 is not protected.

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What happens with those $9,000? You could either file Chapter 13 bankruptcy and pay that back over 36 to 60 months. With Chapter 7 bankruptcy, the bankruptcy trustee will allow a 10 to 12-month payment plan. Otherwise, you will lose your car since the trustee would sell it, and all those funds would go to your creditors.

Business Bankruptcy Exemptions and Tools of the Trade

Nate’s issue is not the car; he’s concerned about the business. South Carolina has something unique called the “tools of the trade.” What does “tools of the trade” mean? It means if there’s an asset related to your business, they give you an exemption on top of that. In this case, $1,500 under Title 15 – Civil Remedies and Procedures, Section 41-30(6).

For example, in Florida, there’s no “tools of the trade” exemption. Whatever is part of your business, like if you’re a landscaper with a sit-down mower, weed eaters,  gas blowers, trailers—all that is personal property. However, some states offer the “tools of the trade exemption.” In my opinion, that exemption should be automatically written into the Bankruptcy Code.

So, what are the tools of the trade that Nate has? Well, his computer. Note, while a computer may cost you $2,000 today and be worth much less in six months, valuations are done at fair market value. Simply, it’s garage sale value.

At this point, Nate’s tool of the trade is his computer. That’s going to be protected because its value will be less than the exemption limit. Now, let’s say time goes by, and Nate has money in his bank account. Let’s say there’s $10,000 in the bank account that he’s been able to make from tutoring. You still apply the tools of the trade exemption. If the computer is worth $100 at this point, then we apply the tools of the trade exemption to the $10,000. Only the amount above the exemption limit would be unprotected.

Always make sure to check if your state has the tools of the trade exemption, as it can be a big help, especially for those in trades like landscaping with lots of equipment. For those of us who work off a laptop, that’s also considered a tool of the trade.

Good luck with your business, Nate. I hope it grows tenfold, and I hope to catch you on YouTube soon.

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