Chapter 7 bankruptcy isn’t just available to individuals who are facing overwhelming debt. Businesses can also file for this liquidation bankruptcy. Just as individual debtors have to weigh their options, businesses considering filing for Chapter 7 should understand the pros and cons of this decision. When you retain Toronjo & Prosser Law, you get a dedicated attorney committed to helping you work through the challenges of bankruptcy. Ask us today how our Dallas bankruptcy attorney can serve your business.
The Basics Of Chapter 7 Bankruptcy For Businesses
When a struggling business files for Chapter 7 bankruptcy protection, the process is largely similar to that used for individuals. A court-appointed trustee will liquidate all available assets and properties to pay creditors. Different types of businesses can use Chapter 7. But the exact legal entity under which the business is organized will affect what happens after bankruptcy is complete. We will discuss some of those consequences later.
What Are The Advantages Of Chapter 7 Bankruptcy?
First, consider the benefits of a Chapter 7 bankruptcy for your business. Among the advantages are:
Trustee takes charge of business operations. Companies facing bankruptcy are often hit with one crisis after another as income dries up and bills come due. In a Chapter 7, the trustee assigned to the case will take over the operations of the business. The business owners and principals can then step back as the trustee steps in. Of course, this can be a bad thing for the business depending on the circumstances (see the disadvantages below).
Transparency. Chapter 7 bankruptcy is a relatively “clean” process because the trustee takes over as described above. This, in turn, provides transparency because the company’s assets will be sold and creditors paid in an organized way designed to pay creditors in the correct priority (order). This transparency may discourage an unhappy creditor from pursuing further action to recover on a debt.
Maintain cash flow to pay certain taxes. After a Chapter 7 is filed, an automatic stay is entered which prevents further creditor litigation and collection on any creditor judgments. This allows money to continue going to pay certain obligations such as taxes.
Beneficial for service providers. The bankruptcy trustee only sells off assets, not labor, in order to pay creditors. In other words, businesses in the service industry may find this option attractive as compared to a company that relies more on its assets.
Beneficial for sole proprietors. In a sole proprietorship, there is no distinction between the owner and the business. This means the owner is personally liable for the business’s debt. With a Chapter 7 bankruptcy, the owner’s business and personal debts can be handled at the same time.
What Are The Disadvantages Of Chapter 7 Bankruptcy for a Business?
If your business is looking at Chapter 7 bankruptcy, remember that some disadvantages are:
The business will close. This is perhaps the most significant consequence of a Chapter 7 bankruptcy for a business. After filing, the trustee will work to wind down the business and ultimately close it as assets are sold and creditors are paid.
Trustee takes charge of business operations. Although this may be an advantage (see above), it could be a disadvantage because the owners essentially lose control of the business. The trustee gets to decide what happens to business assets and how creditors will be paid, while the owners can only watch. Assets could be sold for less than the owners would want, but they would have no say in the decision.
No discharge. At the end of the Chapter 7 process, debts are not discharged. Any outstanding debts would still be owed by the company, which creates another potential problem: continued liability.
Potential continued liability. Depending on how your business is structured, you could continue to be liable – personally – for the business’s debts. For example, in a general partnership, the partners are all personally liable. In a limited partnership, meanwhile, the general partner is personally liable while the limited partners are not. This means exposure of personal assets to the demands of creditors, which is why you should consult a seasoned bankruptcy attorney before deciding how best to file.
Liable for personal guarantees. If you are an owner who personally guaranteed a business debt, you will continue to be liable for that debt even after Chapter 7 bankruptcy. You will also be personally liable if, for example, you borrowed against a personal asset (like a home) to fund the business.
Could open the door to further litigation. A business owner might like to believe that Chapter 7 bankruptcy means the end of legal problems. However, a creditor could allege misconduct like fraud or alter ego and seek to hold an owner or subsequently-formed company liable.
Let Us Help You Make The Right Choice For Your Business Bankruptcy
Compared to a personal Chapter 7 bankruptcy, there are several additional factors that must be evaluated before deciding how your business should file. However, for many owners, Chapter 7 bankruptcy offers the most efficient way to liquidate and close their business.
Remember, you have options. If your company is finding it difficult to keep up with debt, talk to Toronjo & Prosser Law today.