subject: What Happens When A Business Files Chapter 7? [print this page] Individuals who wake up and find themselves knee deep in debt, with no recourse to repay the debt, have the option of filing for Chapter 7 bankruptcy. But businesses can file for Chapter 7 bankruptcy as well.
So what happens when a company files for Chapter 7 bankruptcy? If successful, the business's assets are liquidated. The money received from the liquidated items are distributed to the unsecured creditors. When these assets are liquidated, the remaining debts are wiped out by the courts. This leaves the owners of the business to go on about their lives. But there are different types of businesses - corporations, partnerships, sole proprietors, limited liability partnerships, and so on. The bankruptcy rules are a bit different for each one of these.
For example, take the case of a company which is set up as a sole proprietorship. In this type of business, there is no distinction between you and your business. Your income is the business's income and your debts are the debts of the business. This means that if you file for Chapter 7 bankruptcy and have business assets, those assets can be sold to raise money to pay your creditors.
However, In reality, you have very limited control over which of your assets will be sold. Those decisions, for the most part, will be decided on by the bankruptcy trustee. For instance, assume that you are a sole proprietor and that you own a retail establishment. You may have inventory that, in theory, is worth a few thousand dollars. But, if the trustee makes the determination that the cost to sell them is not worth the possible income received, he may decide not to liquidate them. Thus leaving them in your possession. For other assets, he may make the exact opposite decision.
Irrespective of what assets you believe will or will not be liquidated,the process is the same. The bankruptcy trustee will follow the directives of the court and go through all of your assets with you and make a determination which assets are worth selling. In many cases, his final determination will effectively put you out of business.
For instance, assuming that you own an automobile fix-it/repair shop. And after the trustee looks over your records, he decides that selling your auto equipment and tools can effectively be sold for enough money to pay back some creditors. He may have them seized and put up for sale or auction. In cases like this, with no equipment to carry on your business, you effectively no longer have a business to run.
One way to possibly prevent this from happening is to apply for an exemption. If the exemption is not granted, however, you are out of luck.
The bankruptcy trustee has immense powers. And, when all is said and done, which assets you get to keep and which ones you forfeit is largely in his hands.
What Happens When A Business Files Chapter 7?
By: David Hoyer
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