Corporate Bankruptcy Chapter 7
Also known as a straight or liquidation bankruptcy, a Chapter 7 business bankruptcy is a kind of bankruptcy that can help you liquidate your corporation or limited liability company, also known as an LLC.
This option has its pros and cons, so it’s important that you explore and analyze all of your options before moving forward with filing a corporate bankruptcy Chapter 7. It’s also essential to know everything you need to know about what a Chapter 7 corporate bankruptcy is and how it works.
The basics of a corporate bankruptcy Chapter 7 for corporations and LLCs
A Chapter 7 bankruptcy works much differently for businesses and organizations, particularly corporations and LLCs than it does for individuals, because of a few factors. These factors include the ability of collectors and creditors to take steps to shift liability from the business to an individual, an increased need to safeguard the interests when these companies close, and the unique status of these kinds of businesses as a separate entity.
Closing a corporation or LLC
When closing the doors of your LLC or corporation, the corporate officer or managing member of your LLC needs to liquidate or sell off the business assets and send these funds to your creditors or collectors. You also need to file a notice of proper closure with the secretary of state.
Failing to follow these rules can subject anyone who owns even a portion of the company to liability. These business closing requirements are meant to discourage you from funneling assets to insiders, like family members, business partners, or stakeholders, since a creditor cannot collect any remaining debts from the business once the business is closed.
How a Chapter 7 corporate bankruptcy works
A corporate bankruptcy Chapter 7 does not enable the continued operation of the LLC or corporation, unlike a Chapter 11 bankruptcy, so if you file a Chapter 7 corporate bankruptcy, you will need to shut down your company. After you file a Chapter 7 corporate bankruptcy, the bankruptcy trustee will sell all of your business assets and send the proceeds to your collectors and creditors, according to the priority order established under bankruptcy legal rules and regulations. The goal of this type of bankruptcy is an orderly business liquidation. Filing the Chapter 7 corporate bankruptcy will close your business, and LLCs and corporations don’t receive a debt discharge with this type of bankruptcy, since it isn’t necessary. Creditors and collectors are unable to collect more money from your business once it’s closed, since there is nothing valuable left to take from you.
Keep in mind that leaving the debt in place, instead of wiping out the debt, enables collectors and creditors to take action against people when needed. For example, a collector can seek out payment from you through a personal guarantee, which is an agreement that you are personally liable for business debt, or try to litigate under fraud or alter ego theory.
Benefits of Chapter 7 corporate bankruptcy
Here are some of the top advantages of Chapter 7 corporate bankruptcy, particularly for LLCs and corporations:
- Higher level of transparency. Shutting down a business through a Chapter 7 corporate bankruptcy enables better transparency. It makes it much simpler to prove that the business closure was done legally, which can keep creditors and collectors from trying to litigate against you.
- Can keep creditors from pursuing litigation. While this type of bankruptcy doesn’t always protect against litigation, the liquidation process can eliminate a popular concern of creditors and collectors, that a business officer could be diverting their money into private coffers instead of paying creditors. A Chapter 7 corporate bankruptcy is meant to sell off all of your business assets and pay your responsibilities in a public way.
- Leave the hard work to a trustee. Another huge benefit of a Chapter 7 corporate bankruptcy is that you can step away from the business closure and leave all of the hard work to your bankruptcy trustee. This includes things like selling off all of your business assets and paying your creditors.
Drawbacks of Chapter 7 corporate bankruptcy
That being said, Chapter 7 corporate bankruptcy does have a few disadvantages, including:
- You lose control of your business. You lose control of your company when you file a Chapter 7 corporate bankruptcy, meaning that the bankruptcy trustee takes over all of your company assets and decides whether to sell the company as a whole or sell off the assets individually in order to pay back the creditors and collectors.
- You could be considered personally liable for business debt. You can also be considered personally liable for your company debt, meaning that any debt remaining after the bankruptcy is your responsibility. And the amount of debt remaining post-bankruptcy could be greater than if you simply sold off your business assets on your own. For example, you can often get a better price for your company assets or the business than the trustee can, since bankruptcy assets are often sold at a deal. Also, you are unable to settle or negotiate debt for a lower amount than what’s legally allowed with bankruptcy.
- Creditors have a public form to air complaints. Another huge drawback of a Chapter 7 corporate bankruptcy is that your creditors and collectors have a public forum in bankruptcy court to air any complaints they have about how you handled your business finances. These legal disputes can shift the liability from your business to you as an individual.
- Creditors can file adversary proceedings. It’s also pretty easy for a creditor to file an adversary proceeding, which is basically a lawsuit. Creditors and collectors can use this adversary proceeding to bring up a number of different theories that would shift the liability from your business to you as an individual and enable the creditor to collect money from your own personal assets.
That’s why we recommend speaking to a Chapter 7 bankruptcy attorney in Florida like the Van Horn Law Group to learn more about filing a corporate bankruptcy Chapter 7 case.
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