How Chapter 7 Bankruptcy Can Help a Corporation or LLC

When you want your corporation or Limited Liability Company (LLC) to go out of business, a chapter 7 bankruptcy (liquidation) can help you sell the company’s assets in a systematic, organized fashion.

First, the Fundamentals

When you form your company, whether it’s a corporation or an LLC, you file paperwork with your secretary of state and pay various fees. This sets up your company as a separate legal entity. At that point, you become a “shareholder” of your corporation, or a “member” of your LLC. As a separate legal entity, your company has its own assets and liabilities, completely separate from your own.

Responsibility for Debts
As a separate legal entity, your corporation or LLC is legally responsible for paying its own debts. As a company owner, you are not liable for paying any of the company’s bills. This is why forming a corporation or LLC is often an easy way to protect your personal assets from your company’s creditors.
So unless you cosign or personally guarantee a business loan, or offer your personal property as security for a loan, you cannot be held liable for your company’s debts.

How Your Company Benefits
Businesses do not receive a “discharge” in bankruptcy in the way a person does. And a Chapter 7 business bankruptcy does not allow any exemptions.
Instead, the bankruptcy trustee takes control of the business assets, sells them, and then distributes the money from the sale to the company’s creditors according to their legal priority. This means you don’t have to sell the company’s assets or work with its creditors.

If You Are Personally Responsible
If you took on the personal responsibility for paying the company’s debts, and if the trustee did not raise enough money from the sale to pay the creditors in full, then those creditors can come after your personal assets for the balance due.

The best advice is, when possible, not to personally guarantee your company’s loans. But if you are liable for the company’s debts, then it’s a good idea for you to also file a Chapter 7 liquidation bankruptcy. Since the bankruptcy court will discharge your personal obligations, then your liability for company debts will be erased in your Chapter 7 bankruptcy.

The Downside of a Chapter 7 Business Bankruptcy

When your business files a Chapter 7 bankruptcy, the business no longer exists. You cannot stay in business or sell your company to a third party.

In most cases, you could sell your company’s assets for more money than the bankruptcy trustee can. So if you are personally responsible for company debts, then you should consider selling the company’s assets yourself to pay off the creditors. This would reduce, and perhaps eliminate, your personal responsibility for making up the difference.