Chapter 7: Business Bankruptcy

Toronjo & Prosser Law provides comprehensive debt relief services to business owners in the Dallas-Fort Worth area. We are keenly aware that the Texas economy is subject to factors that can force a small business into bankruptcy. While some businesses can reorganize their debt and return to profitability, in most instances, filing a Chapter 7 business bankruptcy is the only option.

Because a business bankruptcy impacts numerous parties in interest — creditors, lenders, landlords, vendors — it is crucial to seek counsel from an experienced bankruptcy lawyer. When you consult with us, we will help you navigate a small business bankruptcy and work to make sure your interests are protected. Although filing a Chapter 7 business bankruptcy means closing your business, eliminating your debt can help to clean the slate.

When your financial future is hanging in the balance, you need the informed representation Toronjo & Prosser Law provides. We offer free consultations and affordable payment plans tailored to your financial circumstances. The sooner you contact our office, the sooner you can wind down your business and move forward financially.

Bankruptcy Options Available to Small Businesses in Texas

Generally, there are two forms of business bankruptcy: Chapter 11 and Chapter 7 bankruptcy. Chapter 11 bankruptcy is best suited for a business that only needs to reorganize its debts to remain viable. Under a creditor- and court-approved payment plan, the business is allowed to retain its assets and continue operating until the debt is discharged. The majority of Chapter 11 bankruptcies are not successful, however, in which case the court may convert the bankruptcy into a Chapter 7 filing.

Chapter 7 Business Bankruptcy

Chapter 7 bankruptcy can provide relief when a business is faced with insurmountable debt. This form of bankruptcy is referred to as a liquidation or a straight bankruptcy. Some of the leading reasons for a small business bankruptcy include:

In other words, many small businesses get into financial trouble through no fault of their own. In a Chapter 7 proceeding, the business ceases operations and a court-appointed trustee liquidates the assets and distributes the proceeds to the creditors to pay off as much debt as possible. If the business is a sole proprietorship, both the owner’s personal and business assets can be subject to liquidation.

It is also important to note that partnerships and corporations are not eligible for exemptions in a business bankruptcy. The secured creditors have a right to repossess property the business used as collateral for the debt while the trustee can liquidate all of the business assets. Creditors may also be able to participate in the distribution of assets made by the trustee.

Some of the more common debts owed in a Chapter 7 business bankruptcy include:

  • Lease obligations
  • Contracts
  • Utility bills
  • Credit cards
  • Loans
  • Overdue accounts

Although the business is liquidated, it does not receive a discharge of debts because there is nothing of value left for creditors to take. However, individual owners who have offered personal guarantees (as is often the case) may still be liable for any remaining outstanding balances, which will make filing a personal bankruptcy necessary.

What is the Major Disadvantage of Chapter 7 Bankruptcy?

There are a number of benefits to filing a Chapter 7 bankruptcy. For sole proprietors, both business and personal debt can be eliminated in one filing. In addition, once the bankruptcy petition is filed, the automatic stay goes into effect which stops all collection activities, including foreclosures and creditor lawsuits. However, the downside to Chapter 7 bankruptcy is that the business you have worked so hard to establish will be closed.

Chapter 7 bankruptcy raises concerns for a business structured as a partnership because the business debt is not discharged. Therefore, the partners are responsible for the business debt and their personal assets are at risk of sale by the trustee to pay off the creditors.

Finally, for a corporation or LLC, a Chapter 7 bankruptcy allows the business to close in an efficient and transparent manner without putting the owners’ personal assets at risk. If the business assets have been improperly handled, however, a creditor could bring an “alter ego action” to pierce the corporate veil and go after personal assets as well.

What Happens if My LLC Files Bankruptcy?

Filing for Chapter 7 bankruptcy in Texas will dissolve your LLC. Its assets will be liquidated and distributed to creditors, potentially leaving nothing left for members. Personal liability for unpaid debts is rare for LLC members, but it can happen if you personally guaranteed debts or commingled business and personal finances. Consulting a bankruptcy attorney is crucial to understand your options and protect your interests.

Contact Our Experienced Texas Bankruptcy Attorneys

If your business cannot pay vendors or meet payroll or is struggling to stay afloat, turn to Toronjo & Prosser Law. When you consult with us, we will determine whether a Chapter 7 business bankruptcy is the best option for you and advise you of your personal liability risk.

Our attorneys are well-versed in the U.S. Bankruptcy Code and have handled thousands of personal and business bankruptcies. We know the ins and outs of the local bankruptcy courts and will guide you through the legal system. Above all, we will help to wind down your business in an efficient manner so that you can map out your financial future. Please contact our office today to speak with our business bankruptcy lawyers.