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Does Chapter 7 bankruptcy make sense for businesses?

On Behalf of | Jul 23, 2020 | Business Bankruptcy

As a business owner, you’ve likely put lots of time and money into building your enterprise. Your efforts may have paid off for a while. Yet, you may now find yourself facing financial setbacks you did not anticipate. Your business may have reached a point where it is not generating significant income. Or, its liabilities may far exceed its assets. In these cases, you might find the option of Chapter 7 bankruptcy appealing, since it will liquidate your business’ assets to cover its debts. Yet, before you pursue it, it’s important to understand this arrangement’s pitfalls.

The risks of liquidation

Filing Chapter 7 bankruptcy for your business allows a bankruptcy trustee to liquidate its assets. Their sale will help repay your creditors if doing so is otherwise impossible. Yet, this arrangement makes most sense if you are a sole proprietor who can perform their trade regardless of assets. In this case, you will file personal Chapter 7 bankruptcy to discharge your business debts.

If you are not a sole proprietor, a bankruptcy discharge will not follow your business’ liquidation. Your business will likely close as part of your Chapter 7 filing. And if your business is a partnership or has shareholders, Chapter 7 could put them at risk, too, since they are also responsible for its debts. If liquidation does not repay your creditors in full, they – or your bankruptcy trustee – may come after you or your partners’ personal assets.

Restructuring your business debts

If you plan on closing your business, filing Chapter 7 bankruptcy may not be a cost-effective way to do so. Your business’ liabilities may be significant. But its assets could sell for more than what a bankruptcy trustee would liquidate them for. This difference will allow you to pay more of your debt without a bankruptcy appearing on your credit report. And it helps you avoid the cost of bankruptcy filing fees. If selling your business’ assets does not cover its liabilities in full, you may be able to negotiate with your creditors about how you will repay your remaining debt – and how much of it you will pay.

Unless you are a sole proprietor, you will want to avoid filing Chapter 7 bankruptcy for your business. By pursuing alternative options, you can work to satisfy creditors in a way that does not put you or your business partners at risk. An attorney with bankruptcy law experience can help you understand your possible paths forward.