What You Need to Know About a Chapter 7 Business Bankruptcy

When you file for a Chapter 7 business bankruptcy, the bankruptcy trustee takes control of your business’s assets and sells them to raise money to pay off the business’s creditors.  Business bankruptcies do not have any exemptions.  The business is shut down and all of its assets are sold.

After all of the assets are sold, no obligations remain.  The business will owe nothing to anyone.  The business itself will no longer exist.  If the sale of assets does not raise enough money to pay the creditors in full, then they must settle for whatever money the trustee pays to them.  You have no personal obligation to pay the bills unless you co-signed or personally guaranteed the business’s debts.

If the sale of assets raises more money than is needed to pay business debts, that money goes to the business owners.  But in most cases, the business’s liabilities far exceed its assets, so business owners usually get nothing.

Personal Liability Remains

If you co-signed or personally guaranteed any of the company’s obligations, then a business bankruptcy by itself will not erase your liability.  Creditors can still come after your personal assets to make up the difference between what the trustee paid them and the total balance due.  In this case, you’d do well to file a personal Chapter 7 bankruptcy to erase your personal responsibility.

Business Bankruptcies Usually Cost More

In addition, to file a business bankruptcy, your company must hire a lawyer.  You cannot handle the bankruptcy yourself.  So the lawyer’s fees will be an added cost, which comes out of the money raised from selling the assets.

The trustee will get “liquidation value” for the assets, which is no doubt less than you could get if you sold the assets yourself.  If you can sell the assets for more than the business owes its creditors, then you may have no need to file bankruptcy.  But if you are personally liable to business debts, then you could file a personal Chapter 7 bankruptcy to erase your liability.

Not For Partnerships

You almost never see a partnership file a Chapter 7 business bankruptcy because the partners are personally liable for the business’s debts.  The bankruptcy trustee may sue the partners personally to raise money to pay the partnership’s bills.  So if you’re thinking about your partnership filing a business bankruptcy, make sure you speak with an experienced bankruptcy lawyer.

One-Owner Businesses May Not Need Business Bankruptcy

If you are the only owner of an LLC or corporation, you may need to file only a Chapter 7 personal bankruptcy.  In this instance, the bankruptcy trustee may take control of your business and sell its assets for you.  Your personal Chapter 7 bankruptcy would eliminate your liability for any obligations of the business.