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Chapter 7 Business Bankruptcy

Bankruptcy can be a way to get back on your feet after getting over your head in debt. Some bankruptcy allows for reorganizing to be discharged from other debts. In addition, liquidation bankruptcy allows businesses to sell off most property and discharge remaining debt. When filing for bankruptcy, your business entity can decide between filing Chapter 7 and Chapter 11 bankruptcy.

There are pros and cons to each type of bankruptcy. Talk to an experienced business bankruptcy attorney about which option is best for your situation.

What Is Chapter 7 Business Bankruptcy?

Chapter 7 bankruptcy cases involve the liquidation of existing assets to pay off debt. Generally, business assets are not enough to cover the total debt. Creditors will get a portion of their debts repaid, and at the end of the process, any remaining debt will be discharged.

Chapter 7 bankruptcy is for individuals, businesses, corporations, and partnerships. For individuals, Chapter 7 bankruptcy is a way to clear overwhelming debt and get a fresh start. However, many businesses don’t survive after a Chapter 7 filing because most of the assets are gone. For corporations and limited liability companies (LLCs), the business entity may no longer exist after bankruptcy.

After filing for bankruptcy, there is an automatic stay from further collections efforts. The bankruptcy trustee takes over control of all business assets and sells the assets to pay back creditors. In the end, there may be nothing left for remaining creditors or shareholders to recover, and the business is liquidated.

How Is Chapter 7 Different From Chapter 11 Business Bankruptcy?

Chapter 7 is a liquidation bankruptcy, which sells off anything of value until no more corporate debt remains. Chapter 11 is a reorganization bankruptcy, which allows the business to reduce certain debts with a payment plan but remain in business.

In general, Chapter 7 is for businesses that are insolvent and too far behind in debts to be able to recover. Chapter 11 businesses may still have the potential for profitability and can continue operating after debt discharge.

Can I File Chapter 7 Bankruptcy as a Sole Proprietor?

If you are a sole proprietor of a small business, there are additional concerns about filing for bankruptcy. Bankruptcy for a sole proprietor could put your personal assets at risk of liquidation if they are intermingled with your business’ assets. However, you could also get debt relief for personal debts, including credit card bills, medical bills, and personal loans.

Depending on state and federal bankruptcy code exemptions, personal bankruptcy exemptions could protect some personal assets. Talk to a bankruptcy attorney if you have questions about personal liability in a business bankruptcy filing.

Can I Lose Personal Assets in a Business Bankruptcy?

In some bankruptcy filings, your personal property could be at risk of liquidation by the trustee. This can depend on the type of business entity:

  • Sole proprietorship: A sole proprietor’s bankruptcy is treated like a personal bankruptcy. You can claim exemptions to protect certain property, but other business and personal property can be liquidated.
  • General partnership: If partners are personally liable for debts, a Chapter 7 filing for the partnership will not discharge those debts. To discharge all business and personal debts, the partners could file bankruptcy as a partnership and individually.
  • Limited partnership: In most limited partnerships, the partners are usually protected from personal liability.
  • Limited liability partnership: Bankruptcy for an LLP separates the partnership debts from personal liability.
  • Limited liability company or corporation: Owners in an LLC or corporation are not personally liable for business debts.

Some business loans require a business owner to personally guarantee the loan. With a business bankruptcy, the business owner may still be personally liable for those business loan debts.

What Is the Chapter 7 Bankruptcy Process?

From beginning to end, the entire process for Chapter 7 business bankruptcy generally takes 4 to 6 months. The process can take longer, so talking to your bankruptcy lawyer is important.

Bankruptcy begins when you file a bankruptcy petition with the bankruptcy court. Filers also have to provide:

  • List of all assets and liabilities
  • List of income and expenditures
  • Statement of financial affairs
  • List of contracts and leases

Immediately after filing, creditors are prohibited from attempting to collect outstanding debt.

After the paperwork is filed, a trustee will be appointed to take control of all company assets. The trustee will sell or liquidate the assets. Any funds will be distributed to the creditors. Not all creditors have equal opportunity for repayment.

There are six classes of claims under the bankruptcy code, and each class is paid in full before the next class can begin to recover debts. Secured creditors are generally repaid first, with the remainder going to unsecured creditors. Shareholders may get a share of whatever remains.

The trustee’s role is to maximize the return for creditors. For businesses, the trustee can even continue operating the business for some time if it would benefit creditors. The trustee can also try to recover any questionable transfers of assets or liability just before filing. Under the trustee’s “avoiding powers,” the trustee can set aside asset transfers made within 90 days before filing.

How Can a Bankruptcy Attorney Help With Chapter 7?

Bankruptcy law is complicated. A bankruptcy attorney understands the complex rules and how to get the best results for you after filing for business bankruptcy. A bankruptcy attorney can be important for small businesses at greater risk of having personal assets associated with their business assets. Talk to an experienced bankruptcy lawyer for legal advice about your business debt situation.

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