Source: https://www.colemanlegalgroup.com/chapter-7-business-bankruptcy/
Timestamp: 2019-04-26 00:42:09+00:00

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There are two main bankruptcy protections under the US Bankruptcy Code available to businesses: Chapter 7 and Chapter 11 each named for the chapter of the Bankruptcy Code. Chapter 7 may be an appropriate remedy for businesses that simply cannot meet their obligations. Chapter 11, on the other hand, is available to businesses that are in position to recover and carry on with their business if only they are given some time. Chapter 7 and Chapter 11 differ in how they work and the rights and remedies each provides. Below explains what business owners need to know about a Chapter 7 business bankruptcy.
What Is a Chapter 7 Business Bankruptcy?
Chapter 7 is sometimes also called liquidation bankruptcy because your assets will be sold (i.e., liquidated) and distributed to the creditors who file proper claims. An individual, a partnership, or a corporation or other business entity can file bankruptcy under Chapter 7, [11 U.S.C. § 101(41), 11 U.S.C. § 109(b)], but a discharge of debt is only available to individual debtors, not to partnerships or corporations. [11 U.S.C. § 727(a)(1)]. So if a partnership, a corporation, or other types of business entities file a Chapter 7 bankruptcy, it does not receive a discharge. Instead, the bankruptcy trustee appointed by the court will sell any of your business assets, such as equipment, inventories or receivables, to pay your debts. If you are closing up your business and want to get rid of the business debts officially and finally, Chapter 7 may be your option. A sole proprietorship, an unincorporated business entity owned by a single individual, is however, treated as an individual instead of a separate legal entity apart from its owner.
How Does a Chapter 7 Business Bankruptcy Work?
The business debtor must file a petition with the bankruptcy court serving the area where the business is organized or has its principal place of business or principal assets. In addition to the bankruptcy petition, the business debtor must file with the court: a list of assets and liabilities; a detailed list of current income and expenditures; a statement of financial affairs; and a list of executory contracts (a contract that has not yet been fully performed or fully executed) and unexpired leases. Before you file for a Chapter 7 bankruptcy, it is important to gather all your financial records including bank statement, credit card statements, loan documents, paystubs because the bankruptcy trustee will request you to provide such records to verify the information contained in your bankruptcy document. You must file the necessary documents with the clerk of the bankruptcy court and pay a case filing fee (in the amount of $335). Once you file your bankruptcy petition, an automatic stay goes into effect and creditors generally may not initiate or continue collection activities, such as bringing lawsuits or making calls demanding payments, against the debtor. [11 U.S.C. § 362].
As mentioned above, in a business bankruptcy, there is no discharge (and no exemptions). As a result, all of your business assets are sold and the proceeds are distributed among the creditors. A bankruptcy trustee of the case will close and liquidate your business in a manner that maximizes the return to the creditors. In some cases, the bankruptcy court may authorize the trustee to operate the business for a limited period of time if such operation will benefit creditors and enhance the liquidation of the business debtor’s assets. [11 U.S.C. § 721].
The bankruptcy trustee will use the proceeds from liquidation to pay creditors who are ordered by priority. There are six classes of claims and each class must be paid in full before the next lower class is paid. [11 U.S.C. § 726]. Secured creditors (those who loaned out the money with collateral) are the first class to be paid. After all secured creditors are paid, remaining assets are collectively paid to unsecured creditors (those without collateral). The trustee ensures that the proceeds are paid to the specific creditors. After everything is distributed, the Chapter 7 bankruptcy is closed.
In a business bankruptcy, if your business assets were not enough to pay off all creditors, you may personally be liable. Depending on the structure of your business, you may be held liable for your business debts. For example, in general partnership, all partners are personally liable for the partnership’s debts and if the partnership cannot pay its debts creditors can go after the partners’ personal assets to satisfy them. In a corporation, the owners (shareholders) may not be personally liable unless you voluntarily make yourself responsible for business debts by cosigning, personally guaranteeing the loan, or by providing your personal assets as collateral. If you are obligated to pay your business’s debts but you yourself are suffering financial hardship, you may have to file a personal Chapter 7 bankruptcy to discharge your obligations. Be sure to discuss with your bankruptcy attorney.
For an individual debtor, all dischargeable debts are wiped out and the debtor is no longer required to pay them. However, because a business debtor cannot receive a discharge, the benefit of Chapter 7 is more about the simple and orderly liquidation of the business. A bankruptcy trustee is charged with liquidating and distributing the proceeds to creditors based on priority, and therefore you do not have to worry about closing your business, liquidating your business assets and dealing with creditors.
However, when a Chapter 7 bankruptcy is filed and closed, there is no opportunity to continue the business or sell it to someone else. Plus, the bankruptcy trustee may sell your assets for less than what you could have gotten for them. Therefore, if your business has a significant amount of assets that may be enough to pay all creditors, you may want to sell them yourself instead of filing Chapter 7.
You may choose to file business bankruptcy under Chapter 7 depending on your business’s financial situation and its goal. If your business passed the stage of reorganizing the business and repaying the creditors, Chapter 7 may provide an appropriate protection. However, there is no simple answer to the question of whether or not Chapter 7 is a better option for you and your company. Be sure to contact an experienced bankruptcy attorney to discuss your particular circumstances. The attorney can best advise you with your business bankruptcy after examining your assets, income, financial statements and obligations.

References: § 101
 § 109
 § 727
 § 362
 § 721
 § 726