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  • Writer's pictureBrett Weiss

Should a Business File for Chapter 7?

We are often contacted by potential clients who want to file a Chapter 7 bankruptcy for their closing business. Our answer usually is that this isn't a good option. Why?

Chapter 7 is the chapter of the Bankruptcy Code most people think about when they think of bankruptcy. In a Chapter 7, the debtor's non-exempt assets with value may be liquidated by a Chapter 7 Trustee and the proceeds distributed to creditors (with the Trustee taking a commission). If their business is closing, the potential client thinks, this is a good way to get rid of corporate debt so that the business can get a fresh start.

The only problem is, this usually isn't how it works.

Unlike individuals, corporations and LLCs cannot receive a Chapter 7 discharge. This means that at the end of the case, creditors can still attempt to collect from the business. Also unlike individuals, corporations and LLCs cannot claim any exemptions---they cannot protect any of their assets that have equity from liquidation. The result is that the Chapter 7 Trustee will liquidate any assets that have value and if the business reopens after the case is done, creditors can resume their collection activities.

As a result, if a business is not going to reorganize under Chapter 11, I will frequently recommend that it simply close its doors and not file.

There are some exceptions to this general rule. If an orderly liquidation of assets is of value (tax debt that the individual owner could end up responsible for, or many claimants against the assets) it might be appropriate to file a Chapter 7 for the business. And if the client is a farmer or fisherman, there is a separate chapter of the Bankruptcy Code that provides for their reorganization (Chapter 12).

So before you think that your business needs to file a Chapter 7, check with an experienced bankruptcy attorney (such as us!) first.

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