22 Sep Should Your Company File Chapter 7 Bankruptcy?
Most of the time, there is no reason to file a Chapter 7 bankruptcy for a corporation or limited liability company. (We’ll call them both “companies” in this post). However, there are some instances where filing Chapter 7 for the company makes good sense.
Normally, bankruptcy is about one thing: the bankruptcy discharge order. The order states, with some exceptions (such as some taxes, student loans, domestic support obligations), that the debtor’s debts are terminated. The debtor then has the benefit of a “fresh start” to rebuild his life.
But what if the debtor is the owner of a corporation or limited liability company? If the debtor files bankruptcy, should the company file bankruptcy as well? Usually not. The company does not get a discharge in Chapter 7 because it’s not an individual. When the Bankruptcy Code says “individual,” it means a human being.
In most instances, the only thing the company gets by filing a Chapter 7 bankruptcy is a decent burial. You might care whether Aunt Francis gets buried in a dignified matter, but for your company, well, not so much. The company can be dissolved under state law without the need to pay a bankruptcy attorney to file a Chapter 7 bankruptcy.
However, the answer to this question, as with almost any bankruptcy question, is, “it depends.’ There are advantages to filing the company’s bankruptcy.
- First, filing Chapter 7 leads to closure. The creditors will no longer be able to pick apart the company assets, nor will they be able to inconvenience the shareholder or member regarding the company’s finances. The bankruptcy trustee takes control of the company assets and sells anything of value. This is called “liquidation.” Any resulting funds are used to pay the creditors. The Chapter 7 drives a stake through the heart of the company and quickly ends its existence.
- Second, sometimes the owners actually care what creditors get paid. For example, if the owner is liable for payroll taxes of the company as a “responsible person,” he would want those taxes paid. If the company has assets, those assets can be sold to pay taxes, which are a “priority claim” in the bankruptcy. Priority claims get paid before other creditors. So if the tax debts are paid from the sale of the company assets, that liability won’t fall back on the individual owner.
- Third, your bankruptcy attorney needs the fee from filing the case for his own financial needs, such as paying for office overhead, making retirement contributions for his employees, or paying his daughter’s car insurance. If you really want to make a contribution to your attorney, paying him to file a Chapter 7 for your company is an excellent way of doing that. I personally offer this option to my clients, but, unfortunately, most decline.
One last thing: don’t confuse Chapter 7 (“liquidation”) with Chapter 11 (“reorganization”). The goal of a Chapter 11 is to save the company by reorganizing it. We are not addressing the merits of Chapter 11 here.
Sometimes there are good reasons to file a Chapter 7 bankruptcy for your company. Get counsel from a bankruptcy attorney who will look out for your best interests in making this decision.
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