Chapter 7 Bankruptcy for Sole Proprietors in New Jersey

In the eyes of the law, a sole proprietorship and the individual who owns the business are treated as one and the same. As a result, while entities such as corporations and LLCs may be required to file under a different chapter, Chapter 7 bankruptcy for sole proprietors in New Jersey may be a viable option. Despite this, a business bankruptcy filed under Chapter 7 is handled slightly differently than one involving purely personal assets.

It is important to understand that filing under Chapter 7 will typically result in a liquidation where the business ceases to operate entirely after the process has concluded. A New Jersey bankruptcy attorney could explain the nuances of Chapter 7 bankruptcy for sole proprietors.

Means Testing

Filing a Chapter 7 bankruptcy for sole proprietors in New Jersey requires that the debtor meet the same requirements that apply if no business operations were involved. Therefore, as an initial hurdle in determining whether Chapter 7 is permissible, a person must satisfy New Jersey’s means test if their monthly income exceeds the New Jersey median income levels.

Determining whether someone passes the means test involves gathering information as to all income and allowable expenses to determine monthly average income. Relevant income includes income from all sources, including:

  • Business income from the sole proprietorship
  • Interest and dividends
  • Retirement account distributions and withdrawals
  • Other wage income
  • Unemployment compensation
  • Any amounts paid by friends or family to help with expenses

However, as a sole proprietor, a person may be exempt from the means test if most of their debts are business debts as opposed to consumer debts.

Bankruptcy Exemptions

While a Chapter 7 bankruptcy does operate to eliminate most (if not all) of the sole proprietor’s debts, any valuable assets must generally be sold to satisfy creditors to the greatest extent possible. However, certain property is considered exempt from the bankruptcy estate and, thus, will not be sold. In a Chapter 7 bankruptcy for sole proprietors in New Jersey, both business and personal assets must be considered.

In New Jersey, a debtor in Chapter 7 has the option of applying either the New Jersey or federal exemptions. Importantly for sole proprietors, the federal exemptions under 11 U.S.C. Section 522 allows a debtor to exempt up to $2,375 worth of business property (also known as the tools of the trade exemption).

Because New Jersey does not exempt tools of the trade, many sole proprietors will benefit from choosing to apply the federal exemptions, which can also provide more generous exemptions at the personal level, such as:

  • A homestead exemption (which exempts a portion of the equity in a home)
  • A personal property exemption (covering specific, enumerated household goods)
  • An exemption for your vehicle, up to $3,775 in value
  • A wildcard exemption that can exempt interest in any property, up to $1,250 in value

The federal wildcard exemption can be added to the tools of the trade exemption if the sole proprietor wishes to preserve their business property and attempt to continue operating a similar business in the future.

Getting Help with New Jersey Chapter 7 Bankruptcy for Sole Proprietors

An experienced bankruptcy attorney could help you determine whether the federal or state exemptions are the most beneficial with respect to your business. They could also work with you to determine whether Chapter 7 bankruptcy is the right option for you.

To learn more about Chapter 7 bankruptcy for sole proprietors in New Jersey, reach out to a well-versed bankruptcy attorney. They can explain the process to you so you can determine your best path forward.