04 Oct What Happens When A Corporation Or LLC Files A Chapter 7 Bankruptcy
A corporation or LLC can’t get a discharge by filing bankruptcy. That means there will be no final order from the court saying that all of the debts are gone. So why file a Chapter 7 bankruptcy for your company? My colleague, Russell A. DeMott filed a great post on this not too long ago and laid out several reasons to file a Chapter 7 for a corporation or LLC and several reasons not to file.
To truly make the right decision, however, one needs to know exactly what happens in a typical Chapter 7 filed for a corporation (or an LLC). First of all, like in all Chapter 7 bankruptcies, a trustee is appointed.
His or her job is then to close any on-going business and gather all of the assets of the business. Once gathered, the assets are sold, usually at auction to bring the best price. Any security interest held is paid first from the sale of that asset. Thus, if there is money owed on a truck, it will be sold and the lien paid off.
Then the money is distributed. First, the administrative expenses are paid including the costs of sale of the assets. This can include advertising the sale, paying an auctioneer, repairing or cleaning assets to get a higher price or that kind of thing. Administrative expenses may also include paying an accountant to do a final tax return for the business.
After the administrative expenses are paid, the trustee will gather any claims filed against the business and pay them with the funds remaining from the asset sale. First, priority debts get paid. These include back wages and taxes. After those are paid, the unsecured general creditors get paid pro rata from whatever is left. Then the bankruptcy is closed. The company doesn’t get a discharge just closure.
So, should you file for your corporation? As Russell said in his post: it depends. If you can dissolve the corporation and do the above yourself, save the cost of filing. If you need to just walk away, then maybe it’s worth the fee to have someone else do the heavy lifting.
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