Are Tools Used For My Business Protected In Bankruptcy?

In bankruptcy, a debtor sometimes has property that is nonexempt, meaning not legally protected from being taken to satisfy debts owed to creditors.  In a chapter 7 bankruptcy case, this means the debtor must surrender the nonexempt property to the trustee, or pay the trustee to keep it, which the trustee then uses to pay towards the debtor’s debts. In a chapter 13 case, the debtor is permitted to keep the nonexempt property but must pay, at minimum, the value of the nonexempt property to their unsecured creditors in their repayment plan.  

In bankruptcy, debtors are allowed to exempt, or legally protect, certain essential property, such as their home, a modest vehicle, and basic household goods, furnishings and personal items. Other nonessential property that may be nonexempt includes things like additional vehicles, second homes, and unneeded personal property (i.e. a huge gun collection or lots of extra money in a bank account).  Bankruptcy law is designed to be fair to creditors, while at the same time, protect the debtor’s ability to maintain a basic standard of life.

For this reason, a debtor’s “tools of the trade,” of which the debtor relies upon to maintain gainful employment, are exempt and protected from creditors up to a certain value. The Bankruptcy Code permits the debtor to protect “any implements, professional books, or tools of the trade of the debtor” up to a value of $2,525. Minnesota State Law allows a debtor to protect “tools, implements, machines, instruments, office furniture, stock in trade, and library reasonably necessary in the trade, business, or profession of the debtor” up to a value of $12,500.  In a Minnesota bankruptcy case, the debtor is permitted to choose to either use the Bankruptcy Code exemptions to exempt their property, or alternatively, to use any other Federal or Minnesota State Law to exempt property. 

In order for the property to be considered exempt as a tool of the trade, it must be reasonably necessary for the operation of the debtor’s business. This is not always so obvious. For example, the Court has found that a truck belonging to a professional truck driver is a tool of the trade as it is essential to the operation of the driver’s business. Alternatively, the Court has also found that a van driven by a plumber is not a tool of the trade, even though the plumber uses it to drive to work, as the plumber can continue to perform his duties and continue to operate the business without the van (i.e. he can use public transportation, as impractical as it seems). Whether property will be considered a tool of the trade essentially hinges on whether the property is needed for the debtor to perform the duties required to carry on the business.

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In order to determine whether you will be able to protect the tools you use for business purposes in the event you file for bankruptcy you should speak with an experienced bankruptcy attorney. See us at LifeBackLaw.com!