It’s an unfortunate truth that not every business venture succeeds. If your business is struggling under a load of debt so heavy that you can’t see a way through it, it may be time to declare bankruptcy. For business that may be able to survive through a reorganization, Chapter 11 or Chapter 13 bankruptcy may be the right answer. If, on the other hand, your business venture has reached a point where you can’t see a way for your business to successfully pay its debts and survive long term a Chapter 7 Bankruptcy may be the right option.
Declaring bankruptcy can be a very difficult situation to face, and the decision should not be made lightly. Before making a decision of this magnitude, you should seek the advice of a qualified bankruptcy attorney who can help you understand all of your options. Before you do that, however, we wanted to help you understand the basics of chapter 7 bankruptcy.
Chapter 7 bankruptcy, as its name implies, is based on the seventh chapter of the United States Bankruptcy Code. There is a personal form of chapter 7 bankruptcy that individuals can file in order to discharge certain personal debt liabilities. If your business is a sole proprietorship, it is possible for a chapter 7 personal bankruptcy to discharge business debts through the liquidation — selling off — of any assets that are not considered exempt from liquidation. This type of personal bankruptcy filing, however, does not affect any liabilities that are held by a corporation or Limited Liability Company (LLC). Instead, there are special procedures that must be followed in order for a business to declare bankruptcy under chapter 7 rules.
Because an LLC or a corporation is considered a separate legal entity from the business owner, the business can own assets and debts that are separate from those of the business owner. In short, that means that the company — not the owner — is liable for the repayment of all business debts. If those debts can not be repaid, chapter 7 bankruptcy can be used to liquidate the company and its assets in order to repay the creditors.
Because the company is a separate legal entity from the owner, you won’t generally be held responsible for the repayment of business debts held by an LLC or a corporation unless you co-signed or personally guaranteed the debts. Alternatively, if the company is proven to be nothing more than a facade for the owners, creditors may be able to make a valid claim against the owner and their assets for repayment.
If your business files for chapter 7 bankruptcy, the business will close and all of its assets will be liquidated. A bankruptcy trustee will be assigned to liquidate the company and all of its assets in an orderly manner and make sure that all creditors receive their portion of the proceeds. Once the debts have been officially discharged, the creditors are prohibited from pursuing repayment beyond that distributed through the liquidation process unless an individual has personal liability for the debt in addition to the business’s liability. This typically only occurs if the business owner or another individual is a co-signer on the debt or personally guaranteed the debt.
Under chapter 7 bankruptcy, it isn’t possible for a business to recover because the company itself is dissolved as part of the liquidation process. Once the proceedings have begun and the process of discharging debts is under way, the business will no longer be in possession of any assets with which to continue operating and will essentially cease to exist. There are, however, other types of bankruptcy that can result in a business recovering from its indebtedness. Both chapter 11 bankruptcy and chapter 13 bankruptcy are designed to help businesses to restructure and reorganize so that they can continue operating while they work to pay off their debts.
As you can see, chapter 7 bankruptcy for business is a complicated process that should not be undertaken lightly and should only be pursued under the guidance of a qualified bankruptcy attorney.