Chapter 7 bankruptcy is an option used by LLCs and corporations that have failed financially and are shutting down in the near future. Filing a Chapter 7 bankruptcy works much differently for a business than it works for individual consumers, for a few key reasons. First businesses are legally classified as separate entities, meaning that they are separate from the people who own and run the business. Second, when businesses close, there is a legal need to secure the interests of creditors for liability reasons. Third, there exists an ability for creditors to make efforts to shift blame from the businesses to the individual, which can make a bankruptcy process even trickier.
If you are in charge of a failing business, and find yourself harassed by creditors who are looking to drain you of every dollar, then Chapter 7 bankruptcy may be something that you should begin to consider carefully. While you may possess a solid understanding of financial matters due to the fact that you helped run a business, bankruptcy law is a whole other animal, with complexities unfamiliar to those even with significant financial experience. To hire an attorney who understands bankruptcy law extremely well and can help you through the Chapter 7 bankruptcy process for businesses, reach out to San Diego Bankruptcy Attorney at 619-488-6168.
While the process for filing Chapter 7 bankruptcy as a business is certainly very complicated, and can really only be fully understand by someone with years of experience, it’s a good idea to enter discussions with an attorney with a base level of knowledge. Here is some introductory information about how bankruptcy law works:
Chapter 7 Bankruptcy for LLCs and Corporations: The Basics
Unlike with Chapter 11 bankruptcy for businesses, which allows the institution to keep operating through the bankruptcy proceedings, Chapter 7 bankruptcy is for businesses that that are ceasing to operate in the near future. In fact, filing for Chapter 7 bankruptcy as a business will result in the company having to be shut down, no exceptions. Also, it is important to fully understand that a Chapter 7 bankruptcy will not only result in the closure of the business, it also means the business won’t receive a debt discharge. This is because a debt discharge isn’t necessary in this situation, because a creditor won’t be able to collect on debts once a company is no longer in operation. However, leaving debt undischarged can allow a creditor to pursue collection against an individual, in certain situations. For instance, creditors might try to seek payment if the business was funded through a personal guarantee, since this would mean an individual was culpable for the business debt.
After the Chapter 7 bankruptcy has been filed by the business, and the proper documents have been filled out correctly, a state-appointed trustee is given the power to seize all of the assets owned by the business. Unlike with a bankruptcy being declared by an individual, which allows the consumer to exempt certain pieces of important property from being seized by the trustee, businesses are not allowed to exempt anything in the bankruptcy process, all property owned by the business can be seized by the trustee. After seizing all of the business’s property, the bankruptcy trustee is then free to sell all of the seized assets on the open market. The proceeds from this sale will first be used to cover the administrative costs associated with filing the bankruptcy. The rest of the proceeds will be distributed to the creditors of the business, in order to help them recoup the losses they experienced through unpaid debts. Money is distributed to the creditors according to the priority rules established in bankruptcy law. These rules are too complex to explain in full, but generally, the creditors with the largest debts receive money from the trustee first.
Advantages of Filing for Chapter 7 Bankruptcy as a Business
The main advantage of closing a business by filing for Chapter 7 bankruptcy is that the process allows for a high level of transparency. This means that as the result of the filing of the Chapter 7 bankruptcy, there exists a clear legal record of the closure of the business taking place, with can be an area of ambiguity without a bankruptcy filing. This may prevent an angry creditor from taking legal action against you and/or pursing litigation if they are under the impression that the business hasn’t really folded.
This is because liquidation of the business’s property and assets via Chapter 7 stops creditors from worrying that business funds are being funneled into private hands. In other words, a Chapter 7 bankruptcy stops the creditors from worrying that the individuals who ran the failed business are diverting funds from the business into their personal bank accounts, instead of paying back their creditors as they are legally required to do. This is because Chapter 7 requires a business to hand over all of their assets to a trustee, and sell them in order to repay creditors, in a process that is open to public oversight.
Another significant advantage of filing for a Chapter 7 bankruptcy is that it simplifies the entire process of closing a business. Shuttering an LLC or corporation can be an extremely stressful process, not only because of the negative feelings associated with managing a failed company, but also because creditors will be hounding you constantly. A Chapter 7 bankruptcy will stop creditors from harassing you, as they understand that through a Chapter 7 bankruptcy, they will be paid back at least in part. Also, through Chapter 7, instead of you having to handle the liquidation of the company, which can be a complicated and difficult task, the trustee handles the liquidation of the company.
Also, a Chapter 7 business bankruptcy may help an individual being held responsible for any debts incurred by the business. This is especially true when there exist recoverable assets, preferences, general assets, or taxes that are owed to creditors. Why is this? Well, if taxes, especially trust fund taxes, are not paid in full, then the IRS or state tax authority may choose to go after the individual owners of the business as “responsible persons.” The IRS or state tax authority will deem the individuals responsible for the debts, and pursue corresponding legal action against them. A Chapter 7 bankruptcy helps avoid this situation by allowing the trustee to handle the liquidation of the business. As part of this liquidation, the IRS and state tax authorities will almost always be paid first, and will therefore feel no need to go after the individual owners of the business.
A final advantage of a Chapter 7 business bankruptcy is that it distributes funds in a manner that is fair to all creditors, or at least creates the necessary appearance of an even distribution. If creditors feel as if funds from a liquidation haven’t been distributed to all creditors fairly, they may choose to pursue legal action. A liquidation and distribution of funds handled by a trustee usually avoids this situation, as the creditors normally trust a trustee as a responsible and experienced party who will make sure proceeds are doled out in a fair manner. The distribution in reality isn’t always even, but the appearance of fairness usually dissuades creditors from initiating lawsuits against the company or its individual owners.
Disadvantages of Filing for Chapter 7 Bankruptcy as a Business
However, it should be also noted that there are certain disadvantages associated with filing a Chapter 7 bankruptcy as a business, which one should be aware of before considering it as an option. First, if you choose to file Chapter 7 bankruptcy, you are essentially forfeiting control of your business. Control of the business is handed over to the trustee. While it is certainly nice in some aspect to relinquish responsibility of a business, as you don’t have to deal with the headache that is liquidating a company, it does mean that you won’t control how assets are sold off. As a result of handing over the reins of the business to the trustee, the trustee may decide to liquidate the company in a manner which you do not particularly agree with.
Also, if you find yourself accountable for any of the business’s debt, say as the result of a personal loan, this could represent a problem. This is because in this situation, after a bankruptcy is completed, the total amount of debt leftover may be larger than if one took responsibility for selling the properties yourself. There exist a few main reasons why this could occur. First, you could be able to sell the assets for a higher price than the trustee. Second, the sale proceeds will inevitably be diminished by the fraction the trustee would garnish to pay for the administrative costs of handling the bankruptcy.
Another possible disadvantage is that it can end up costing more in the long run. Chapter 7 bankruptcy provides disgruntled creditors with a platform to air grievances about the way in which the business’s finances were handled, through the 341 Meeting of Creditors. At this meeting, the creditors may be able to supply information that leads to an investigation about the management of finances. Also, the creditor can file a challenger proceeding, which can result in a litigation process that not only costs a lot of money, but can also result in liability being shifted from the business to an individual.
Handling Personal Obligations with Chapter 7 for Businesses
Despite the fact that corporate businesses and LLCs must be accountable for paying off their own debts, individuals still sometimes find themselves responsible for businesses obligations, in certain situations. Individual parties can be deemed responsible for what are called trust fund taxes, which are taxes that are drawn from an employee’s income. Individuals can also find themselves responsible for business obligations when issues of fraud are part of the closure of the company. This is especially true if the fraud involved an effort to hide funds that were owed to creditors. In these cases of fraud, the individual is legally required to pay back the money owed to the creditor in full, in addition to any other criminal penalties. Individuals will also be accountable for any business debts if the individual funded the business by cosigning debts, or putting up personal property as collateral.
Having your company file and complete a Chapter 7 bankruptcy can help significantly when it comes to dealing with these personal obligations associated with the business. However, it is crucial to understand that filing for Chapter 7 bankruptcy will only help with personal obligations if the trustee overseeing the liquidation of the business’s assets is able to sell enough assets to pay off these debts. If any balances on these debts remains after when the trustee sells of the business’s assets, then your creditors will be free to try and collect on these personal debts. If you had to post collateral as part of a personal guarantee, creditors will be legally permitted to seize this collateral and sell it.
Business Debts that Can be Wiped with Chapter 7
Filing for Chapter 7 bankruptcy as a business will not lead to all of the business’s debts being fully eliminated, even if the proceeds from the liquidation exceed the total amount of business debts. This is because only certain specific kinds of debts can be discharged via Chapter 7 bankruptcy. The good news is that most forms of debts can be wiped with Chapter 7.
Credit card bills, one of the most common forms of business debts, can be discharged with Chapter 7. Most debts associated with lawsuit judgements, medical bills, unsecured debts owed to a single proprietor (such as money owed to individual consultants), and obligations under leases (such as commercial property leases) are able to be fully discharged with the use of Chapter 7 bankruptcy. Notice that all these forms of debts are unsecured debts; secured debts are handled differently. Obligations associated with a secured debt can only be discharged if collateral posted for the secured debt is worth less than the secured debt, in order to cover the difference.
Business Debts that Survive Chapter 7
Some forms of business debts simply aren’t dischargeable via the Chapter 7 process. If the business was fined by the authorities, or was required to pay restitution as the result of a court ruling, then these debts cannot be discharged. This is to stop businesses from using bankruptcy as a way of avoiding paying penalties for financial wrongdoing. Also, most tax debts, such as your recent back taxes, trust fund taxes, and debts taken to pay non-dischargeable taxes will survive Chapter 7.
Also, any debt that arose from fraudulent activity will not be discharged, if the creditor is able to provide evidence for this fraud in bankruptcy court. Also, you can’t discharge debts if it is associated with presumptive fraud. This means that debt associated with a luxury item that was purchased during the 90 day period prior to when you file for bankruptcy, or a cash advance that was taken within 90 days before filing for bankruptcy.
Chapter 7 Bankruptcy for Partnerships
Generally, Chapter 7 Bankruptcy will not work as an option for businesses that are owned by a partnership. This’s because Chapter 7 business bankruptcy won’t wipe away the personal liabilities that the partners have incurred as the result of their business debts. In fact, most times filing for Chapter 7 business bankruptcy will ultimately make it easier for creditors to access the personal assets of the partners. This is because the trustee may choose to initiate a lawsuit against the partners, in order to recover more cash as a part of the trustee’s effort to gain as much money as possible to pay back the creditors.
Chapter 7 Bankruptcy for One-Owner Corporations or LLCs
On the other hand, if you are the sole owner of a corporation or LLC that is going to fail in the near future, then Chapter 7 Bankruptcy might actually be a viable option. This is because Chapter 7 can help you resolve both the debts associated with your business, as well as your personal debts. Through the Chapter 7 bankruptcy process, the bankruptcy trustee may make the decision to completely take over your LLC or corporation. After assuming control of the business, the trustee will liquidate all the businesses assets for you, without any involvement required on your part. Via this process, you would be freed of any personal liability for the debts associated with your business.
Connect with a Chapter 7 Business Bankruptcy Attorney Near Me
Are you an owner of a failing business, and feel completely unsure of how to handle the financial side of closing the business? Do not fear, the Chapter 7 business bankruptcy experts at San Diego Bankruptcy Attorney are ready to help. To speak with one our top-notch attorneys who possesses experience handling business bankruptcy cases in San Diego, call 619-488-6168. This lawyer will be able to answer your questions about bankruptcy law, and help you decide if Chapter 7 bankruptcy is the best choice for you and your business.