Several times a week we receive a call from a business owner to discuss the closing of their business and how to deal with the often large debt owed by the company and usually personally guaranteed by the business owner.
When it comes to closing a business, bankruptcy is one option that can allow a business owner to stop bleeding money and get a fresh start.
It’s a simple fact of entrepreneurship: Small businesses fail all the time and for many different reasons, some of which are outside of the owner’s control.
If you’re falling deeper and deeper into debt by keeping your company open, sometimes the best business decision you can make is to shut down the business and cut your losses. (20% of small businesses fail in their first year, 30% of small business fail in their second year, and 50% of small businesses fail after five years in business. Finally, 70% of small business owners fail in their 10th year in business).
Who can file Chapter 7 bankruptcy?
Chapter 7 is a liquidation bankruptcy, which means all of your non-exempt assets will be sold off by a court-appointed trustee to repay your creditors. Both individuals and companies such as partnerships, limited liability companies (LLCs), and corporations can file for Chapter 7 bankruptcy.
Business owners can file also Chapter 7 for themselves personally or their business. A sole proprietor is personally liable for business debts so they can wipe out all debt with a personal filing. One thing to note however is that although business entities can file a Chapter 7 bankruptcy, they cannot receive a discharge like an individual debtor.
Some things to consider about a Chapter 7 Business Bankruptcy:
Business entities – meaning the corporation or LLC as opposed to the individual owner – are also entitled to file a Chapter 7 bankruptcy.
A Corporation or LLC cannot be discharged of any debt in a Chapter 7 bankruptcy case. So a Chapter 7 Business Bankruptcy is usually not a good solution for businesses which intend to operate after the bankruptcy filing or for those seeking to reduce or restructure their business debt.
In a Chapter 7 Business Bankruptcy, a Trustee is appointed to liquidate any remaining assets and allow the Business to close debt free. After the bankruptcy petition is filed, the Chapter 7 Trustee will be responsible for the assets of the corporation. The Trustee may require that any assets of the corporation be turned over to the Trustee and liquidated to pay debts. Also, the Trustee reviews recently sold assets or transfers of corporate assets.
After a Chapter 7 Business Bankruptcy is filed, an “automatic stay” goes into effect that stops creditors from taking any further action to try to collect their debts unless or until the bankruptcy court decides to the contrary.
The automatic stay is an injunction that is issued against all creditors immediately upon filing a bankruptcy petition. The “automatic stay” does not stop any creditor from proceeding against an individual who signs a personal guarantee on a debt with the corporation.
Prior to the filing of the Petition, the Corporation or LLC will be required to hold a meeting and enter a resolution to file bankruptcy. Thus, it is important that all those with a voting interest in the business review with an experienced attorney the aspects of any Bankruptcy fling.
Small Business Chapter 7 Bankruptcy Cases Are Often Not Necessary
When we are retained to represent a Small Business and/or its owners, we review all options available to address the debt issues.
For Small Businesses which have temporary debt issues which can be solved through a reorganization, we consider a Chapter 11 Bankruptcy for the business or other options to restructure debt and allow the business to survive.
When many people start a business—particularly first-time small-business owners—they are required to personally guarantee any leases, personal loans, credit cards, or equipment loans. This means that when the business fails, they will need to look at filing a personal bankruptcy in order to wipe out that debt they guaranteed.
Most of the small business owners I meet with have little or no inventory and simply need to just shut down their business, file a personal chapter 7, and move on with their life. Although creditors could still pursue the company, there is nothing they can do once the owner files personally bankruptcy.
The majority of business creditors will stop the pursuit of the closed company once they receive notice that the owner filed for bankruptcy protection. The old saying, “You can’t get blood from a turnip” often applies in these cases. They don’t want to waste money chasing a company that has nothing.
Our goal is to provide our Small Business clients with all of their options when faced with debt issues.
Reasons a Business Would File a Chapter 7 Corporate Bankruptcy
As a sole proprietor, Chapter 7 lets you wipe out both personal and business debt in a single filing. And even though your personal assets will be included in the bankruptcy estate, you can use exemptions to protect some—and maybe even all—of your property.
The majority of my business clients who file for Chapter 7 protection are able to keep their personal assets such as their homes and cars. When you meet with a bankruptcy attorney make sure that they review what bankruptcy exemptions will be available to you if you file. These exemptions vary from state to state.
If a company cannot receive a discharge of its debts then why file? Why pay the filing fee and attorney fees and at the end of the day still have no discharge order? The main reason we see many clients request the Chapter 7 business bankruptcy is because they want an easy way to wind down the company and wrap everything up in a neat “package”.
Chapter 7 bankruptcy provides an orderly and transparent method for business entities to wind down their operations, sell off their assets, pay back creditors, and shut the entity down.
Although all these tasks can also be done outside of bankruptcy, doing so through Chapter 7 appoints a Chapter 7 Trustee to handle the estate. Creditors may prefer to see that, because it means there is less chance that the business owner is cheating by hiding company assets instead of selling them to pay back business debts.
Peace of mind is key to many business clients because they need to be able to put this behind them and go on to the next venture.