I frequently meet with clients who own a business that has financial problems. It may not be able to pay its bills as they come due, there may be an eviction threatened, or a lawsuit. These clients have done some homework, and usually start out our meeting by saying that they want to retain me to file Chapter 7 bankruptcy for their corporation or LLC.
They are also surprised when I tell them that for most businesses, Chapter 7 makes absolutely no sense.
Chapter 7 is the type of bankruptcy that most people think of when they think of bankruptcy. For individuals, it results in the discharge of general unsecured debts, such as credit cards and trade debt. It allows for the discharge of some older taxes. So why wouldn’t it make sense for a business in financial difficulty to file?
The answer lies in Section 727(a)(1) of the Bankruptcy Code. This section, which deals with Chapter 7 discharges, says: “The court shall grant the debtor a discharge, unless the debtor is not an individual.” Since corporations and LLCs are not individuals, they cannot receive a Chapter 7 discharge.
This means that, although a corporation or LLC can file for Chapter 7, it cannot receive a discharge. So why would it even think about filing for Chapter 7? That is the subject of an earlier blog I wrote on this topic.