22 Jun Just File for my Business, Please!
So you have your own business and you ran up debt with it. Now you think it might be time to shut it down and cut your losses. Bankruptcy might sound like a good idea, right? Well, maybe but not necessarily for your business.
If you set up a separate company, a corporation or an LLC for example, your business might be able to file bankruptcy alright. But if you aren’t planning to reorganize and continue operations there are often very few, if any, reasons for a small business to file. In fact, it could be downright bad for you.
The first problem is that, in Chapter 7, only individuals can receive a discharge of debt. So your company filing will not eliminate any debt. That alone is usually reason enough not to waste the attorney fees and costs.
Some folks will imagine that their business filing Chapter 7 will get rid of debt they guaranteed on behalf of the company. Unfortunately, it doesn’t work that way. To get rid of personally-guaranteed debt, you will need to explore bankruptcy or work-out options for yourself.
A more dangerous reason is that a Chapter 7 trustee will still have a job to do: Liquidate the company assets and recover any avoidable transfers. If you paid yourself or other insiders back money you loaned to the company, especially in the last year, the trustee may be asking for that money back. So not only won’t your company get out of debt but you may be forced to repay money you probably don’t have anymore.
In reality, a corporate Chapter 7 filing is almost always only beneficial to the company’s creditors and will do the owners and company little or no good.
Are there any good reasons for a company to file Chapter 7? A few.
Sometimes a company’s aggressive creditor has seized a major asset, like a bank account or equipment, through legal process. If there are numerous other creditors who you would prefer to have a share in that asset (say, for example, taxes or debt you are also responsible for), then the Chapter 7 trustee might use his transfer avoidance powers to recover those assets for everyone’s benefit.
It is also possible to legally “launder” the sale of assets from one failing business to a new business through bankruptcy. If you are starting a new business and believe the assets of the failed business could be useful in it, generally the creditors of the old business can try to recover those assets if they can show the new one did not pay the old a fair price. In other words, they were left with a claim against an empty shell improperly. This sort of “successor liability” is a complex issue and the source of much litigation. However, if the old business files bankruptcy and the new business — with new funding of its own — purchases the old assets from the trustee through a fair and open sales process, then typically it will be hard for the old creditors to complain. Of course, you run the risk of being outbid but at least the new business isn’t saddled with old creditors.
And sometimes a Chapter 7 for a corporation is simply for peace of mind. This is rarely a great idea but sometimes creditors will stop chasing a company that has passed through a Chapter 7 bankruptcy because they can assume the trustee liquidated and paid out anything worth liquidating. But sometimes they won’t stop, which gives you some idea how unrealistic some debt collectors can truly be.
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