A Chapter 7 “Straight Bankruptcy” Can . . . Help You Walk Away from Your Business

Closing down a failing business can be a lot smoother with a Chapter 7 case.

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A Chapter 7 can help by:

  • immediately protecting your personal assets
  • giving the bankruptcy trustee the dirty work of distributing the last business assets
  • getting rid of all or most of your debts so that you move beyond your business closure
  • enabling you to make orderly arrangements to pay the special creditor or two which remains.

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Closing down a failing business is a challenging and stressful job. Most likely you have a bunch of creditors beating at your door to get paid, and it is exhausting playing that juggling act. So do you pay as much as you can towards a supplier so you still have inventory to sell or services to render, or to the utilities to keep the lights on, or to the quarterly income taxes to not fall hopelessly behind, or to yourself so you can pay the home mortgage? How do you weigh your legal and personal obligations to all these? And once you decide you’re going to pull the plug, how do you figure out the best time to do it? And in the meantime who to pay and what to do with whatever business assets you have left?  

A Chapter 7 bankruptcy filing can cut through these dilemmas, and legally pass the buck about some of them to the Chapter 7 trustee, with the help of your attorney. Here’s how.

Protection for Your Personal Assets

Whether your business is set up as a sole proprietorship or corporation, or any other kind of business entity, creditors will be trying to reach into your personal pocket to get paid. A bankruptcy filing will immediately impose the “automatic stay” to protect you and your assets from lawsuits, garnishment, foreclosures, repossessions and such.

In addition, most of the time all your personal assets will be permanently protected through state or federal “exemptions”—laws which allow you to keep your possessions away from your creditors, as well as away from the bankruptcy trustee acting on behalf of the creditors. These exemptions usually cover all of your assets–tangible ones like your vehicle and furniture, and intangible ones like retirement accounts.

If your business is a corporation, be aware that the “automatic stay” of your personal bankruptcy case does not prevent collection action taken directly against the corporation and its assets. And your personal exemptions usually do not protect assets belonging to the corporation. The corporation may need to file its own bankruptcy to protect itself. However, this is often not a practical concern because by the time you would be filing a personal bankruptcy the corporation would likely no longer have any meaningful assets.

Orderly Distribution of Your Business Assets

Assuming that the business is not in the form of a corporation but is rather a sole proprietorship, any assets that it does have would come under the jurisdiction of the bankruptcy court once you file your Chapter 7 case. Often those assets are legally protected so that you can keep some or all of them and not have them go to your trustee, and then to your creditors. This is done through your personal “exemptions”—usually the “tool of trade” exemption, especially if you intend to use those business assets for your next job or business.

To the extent that the business’ assets do NOT fit within your asset exemptions, the Chapter 7 trustee would have the right to take possession of them, sell them, and use the proceeds to pay your creditors. The creditors are then paid according to an elaborate priority system, which in many cases first pays creditors which you might want to be paid–often because they are not discharged and you would need to pay them anyway after your bankruptcy. These can include employees, income taxes, child and spousal support arrearage, among others. Giving the trustee the job of liquidating some or all of the business assets and paying creditors according to the law avoids a major headache for you.

Discharge (Write Off) All or Most of Your Debts

Simply put, a Chapter 7 bankruptcy discharge will clean your financial slate so that you can put the business failure behind you and move forward without that burden dragging you down at every turn.

Arrange for Orderly Payment of Any Remaining Debts

To the extent that every debt is not discharged, the financial streamlining that Chapter 7 provides can put you in the best possible position to take care of the debts that remain. You may voluntarily retain certain secured debts so that you can keep the related collateral–your home and vehicle, for example. You may not be able to discharge other debts—certain taxes, in particular. Whether Chapter 7 is the right choice will often turn on how much such debt will remain, and how realistically and reliably you would be able to pay it off without the protection of the bankruptcy court and the other benefits that Chapter 13 would provide.

 

In the next few blogs we will discuss this issue: after closing down a business and filing bankruptcy, when would Chapter 7 be adequate vs. when the extra power of Chapter 13 would be needed, in dealing with particular debt and asset issues. We’ll start the next blog on dealing with taxes.

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