Should I File a Chapter 7 Bankruptcy for a Small Business?

Chapter 7 Bankruptcy for a Small Business: Worth the Trouble?


Chapter 7 Bankruptcy for a Small Business: When You No Longer Wish to Operate the Business Only

A Chapter 7 bankruptcy for a small business is a useful option in certain very specific situations only. Chapter 7 bankruptcy is at essence intended for individuals and not businesses, and it is not therefore possible for a business to obtain a discharge of its debts with a Chapter 7 bankruptcy filing. A Chapter 7 bankruptcy is a liquidation bankruptcy, in which an individual called the Chapter 7 Trustee may seize and liquidate the assets of the filing debtor, whether that debtor is human or non-human. Thus, a Chapter 7 bankruptcy is generally a very bad idea for a business that wishes to continue operations through and after a potential Chapter 7 as the Trustee has the power not only to seize its assets and liquidate them for the benefit of its creditors but also to stand in the shoes of the business owner, write resolutions, and otherwise operate the entity as it is liquidated and wound down through the Chapter 7. A Chapter 7 bankruptcy for a small business is thus useful only when the owner of the business, in fact, no longer wishes to operate the business, wishes it to be liquidated for the benefit of its creditors, and does not mind the Federal government in the person of the Chapter 7 Trustee scrutinizing all of the financial transactions of the business and its owner or owners to a very detailed degree. However, it remains legally possible to file a Chapter 7 bankruptcy for a small business, and there are a few instances in which it may prove useful.

Chapter 7 Bankruptcy for a Small Business: When Can It Be Worth It?

Although a small business cannot receive a discharge of its debts with a Chapter 7, it still receives the benefits of the "automatic stay against collections" upon the filing of the Chapter 7 petition. The automatic stay is an injunction under Federal law that prevents nearly any creditor from engaging in any activity that can be construed as collection of a debt, including invoicing, phone-calls, lawsuits, foreclosures, property seizures, repossessions, the perfection of liens, and other actions. This can be useful to the business owners where they want to protect assets of the corporation from seizure and temporarily halting other collections activity by one or more aggressive creditors. Ultimately, the Chapter 7 Trustee may liquidate assets, but that liquidation, when conducted by the Chapter 7 Trustee, will guarantee payment out of the resulting funds to creditors in a priority order mandated by the Bankruptcy Code: secured creditors, priority unsecured creditors, lease-holders, with other unsecured creditors coming in last, roughly. In other words, the business' assets won't simply be seized by the first creditor of whatever sort to file a breach of contract or collections lawsuit first. They will get what the Bankruptcy Code says that they get based upon the type of debt they are holding, and that's it. The automatic stay will slow creditors down, further, if the owner of the business has personally guaranteed some or all of the business debt (as most small business owners have) while they prepare to concurrently or afterward file a personal Chapter 7 that will permanently discharge their personal liability for the business and other personal debt. Additionally, a Chapter 7 business bankruptcy can be useful for the purposeful liquidation of assets, where the owners feel unprepared to deal quickly and efficiently with this process. The liquidating powers of the Chapter 7 Trustee and the experience of the Trustees in liquidating surrendered assets can, in some circumstances, provide a mechanism for more readily accomplishing a liquidation of remaining assets via a Chapter 7 surrender. However, again, there are many different types of small businesses and whether a Chapter 7 bankruptcy for a small business is advisable for that business may depend upon how exactly that particular business' owner conducted, recorded, and reported the business' financial transactions. It may be that a legal dissolution outside of bankruptcy with the assistance of the business' attorneys and accountants performing the dissolution and asset liquidation per the requirements of Michigan state law will be a winding down of the business that the business' owner or owners may safely maintain a level of control over. In Chapter 7 bankruptcy, the business owner loses control of the dissolution and liquidation process entirely to the Chapter 7 Trustee and is required under Federal law to provide volumes of documentation to the Trustee. Once the small business is wound down, a personal Chapter 7, again, will subsequently discharge the owner or owners' personal liability for any guaranteed business debt.

Chapter 7 Bankruptcy for a Small Business: If the Business Wants to Continue Operations

Otherwise, the form of bankruptcy most suitable for corporations is a Chapter 11 bankruptcy. If the business intends to remain functional and simply needs to reorganize, this is the proper bankruptcy mechanism for accomplishing that. It is, however, not an inexpensive or easy process. Small business owners will want to consult an experienced Michigan bankruptcy attorney to determine whether, given the financial and other burdens of a Chapter 11 or other form of bankruptcy, the business is, on a cost-effectiveness basis, worth preserving. If you are a Michigan resident and are considering filing for bankruptcy, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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