Pros And Cons Of Filing A Chapter 7 Bankruptcy For A Business
There is little doubt that for many people in debt, Chapter 7 bankruptcy can be a life preserver. The opportunity to free yourself of debts, without losing many (or any) significant assets, and to do so in a relatively short amount of time, is unparalleled. But when it comes to filing for Chapter 7 for a business, the analysis becomes a bit more complicated.
No Discharge — But Maybe That’s OK
One major difference is that a business does not get a discharge of debts after the bankruptcy the way an individual does. However, that doesn’t mean that a Chapter 7 bankruptcy isn’t right for your business. There are still some benefits.
Let’s say that you’re looking around your business, and you have assets. Machinery. Inventory. Accounts Receivable. Furniture. Clearly, you have enough assets to pay off your creditors. But how do you transform those assets into cash?
A Chapter 7 bankruptcy can do that, because the trustee will take the business’ assets and handle the liquidation, sale, and distribution to creditors. The Chapter 7 bankruptcy allows you to hand over this arduous task to the trustee, who may have more experience selling things on the open market than you do.
The trustee will also take immediate control of the business’ operations. This may allow you to “move on” with your life, leaving the troubled business behind.
This can be especially helpful if you have personal guarantees on these debts but you don’t want to file a personal bankruptcy. If the trustee is able to sell the business’ assets for enough to pay off the debts, you, personally, won’t owe anything on the guarantee.
Even better, any lawsuits against your business will stop immediately when you file for bankruptcy.
You are free from the lawsuits, motions, depositions, and inquiries into you and your business’ finances that may be involved with business litigation. The lawsuit stops, and the creditor waits for the distribution from the trustee after the company assets are sold.
Drawbacks of a Chapter 7 for Business
The same things that are benefits of a business filing for Chapter 7 can also be seen as negatives. A Chapter 7 will usually result in losing the business and its assets. The trustee will take immediate control of the business.
If you are looking to “wash your hands” of the business and start free, this may be great. But if you’re looking to keep the business alive, but adjust what is owed, you are probably better off with a Chapter 11.
Additionally, because there is no discharge of debt with a business Chapter 7, if you have a personal guarantee on any debts or obligations, and the business’ property isn’t enough to satisfy the debts, you will still be on the hook to pay, personally (unless you file a personal Chapter 7 bankruptcy).