What Happens to a Business After Filing a Chapter 7 Bankruptcy?

E.J. Simonsen | Dec 15, 2021

Businesses dealing with financial difficulties know that bankruptcy will put a stop to harassing or predatory lenders such as MCA lenders and other aggressive creditors. But what happens after the bankruptcy? 

If your business is considering filing a Chapter 7 bankruptcy, it's just as important to know what will happen to the business after the bankruptcy as it is to understand the Chapter 7 bankruptcy process

What Happens to a Business After Filing a Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is often referred to as "the liquidation bankruptcy" because a business ceases ongoing operations and liquidates its assets to pay out creditors. Unlike Chapter 7 business bankruptcy, in Chapter 7 a business cannot file bankruptcy and stay open. 

After a Chapter 7 bankruptcy is filed, the assigned bankruptcy judge will appoint a trustee to oversee your business's bankruptcy case and will manage the orderly liquidation of the business and its assets. After all assets are liquidated — up to and possibly including the business itself — the sale proceeds are distributed to creditors based upon their priority and the business should be closed. 

Once the liquidation is complete, the business's liability to pay the debt is removed. If creditors aren't fully paid, it is no longer the concern of the liquidated business. 

Important Considerations to Make About Chapter 7 Business Bankruptcy

While a Chapter 7 business bankruptcy can help a business resolve its debt, there are some important considerations that any business owner should make before officially making the decision to file. 

1. Assets Are Not Exempt from Sale

Unlike personal bankruptcy, a business cannot designate assets as exempt from sale. All assets are evaluated as to their potential to raise money for creditors. Mistakenly, business owners may only consider tangible assets to be at risk for seizure and sale, such as: bank accounts, equipment, accounts receiveables, inventory, machinery, or other physical assets. Yet, businesses may also have valuable intellectual property or other intangible assets, such as: advertising credits, brand names, copyrights, customer lists, databases, internet domains, logos, patents, phone numbers, websites, 3rd party sponsorships/agreements, trademarks as well as trade secrets (e.g., blueprints/designs, code, recipes, etc.), and more. 

2. Assets Must Be Transitioned 

Assets that are underwater, or which have little equity such as a vehicle, machinery, or property are typically safe from trustee sale, but a determination will still need to be made as to what to do with them.  Arranging pick-up or transfer to creditors may be necessary to mitigate losses and protect owners from personal liability. Also, as the business winds down, assets left in the business name can become inaccessable, trapping themselves or items contained within. For example, safe deposit boxes which held business and personal items may no longer be accessible.

3. No Discharge of Debts

Any remaining debt owed after all assets have been sold still remains. As opposed to a personal bankruptcy or a business Chapter 11, a business Chapter 7 doesn't offer a discharge of the businesses' obligation to pay. That said, an asset-less business with no readily convertible value is unattractive to creditors. Even so, it is strongly recommended that the business closes contemporaneously with the bankruptcy to dissuade zombie debt collection and the perception of inherent value. 

Chapter 7 Business Bankruptcy Doesn't Erase Personal Liability

It's also important to understand that while a business bankruptcy resolves the business’s debt obligations, it doesn't necessarily resolve personal liability. If the owner of the business has personally guaranteed some part of the business’s debt, or under federal or state law is personally liable, or could be charged with fraud or negligence for the business or its finances, they may still be on the hook even after the business’s Chapter 7 bankruptcy.

A few instances where this may or may not apply include: 

  • If the business owner signed a personal guarantee for corporate or LLC debts. The owner will still be liable for business debts, even after the business is liquidated. To resolve the liability, the business owner would need to either file a Chapter 7 personal bankruptcy,  negotiate a settlement with a creditor, or opt for a Chapter 11 bankruptcy instead. 
  • If the business is owned in general partnership, personal liability can flow back to partners depending on how the business is structured. Many partnership agreements fail to provide personal liability protection. 
  • If the business is a sole proprietorship, meaning no LLC or INC, a Chapter 7 for the business is the same as filing personal bankruptcy since you are personally on the hook for all the business debts. So, Chapter 7 bankruptcy can help free both the business and the proprietor from debt liability. 

Chapter 7 Business Bankruptcy Can Get Expensive

Another important consideration to make before your business files for Chapter 7 bankruptcy is the cost. With attorney fees, court fees, and time involved, Chapter 7 bankruptcy can be more expensive than personal bankruptcy, but less than a Ch 11 bankruptcy. What's more, the process isn't private. Filing for bankruptcy opens your business up to the public, a concern for many business owners. 

With those considerations in mind, it's good to know that seeking the support of an experienced business debt relief attorney in your state is always a solid first step. While Ch 7 bankruptcy is a suitable option for some businesses, it's important to evaluate all of your options. With the help of an experienced attorney in your state, you could potentially buy yourself and your business time to negotiate the best price for your business's assets. Then, you could use the money to settle business debts, set up a brand new business, or use a Ch 11 business bankruptcy to restructure your business debts and prevent personal bankruptcy. 

Worried about your business's finances, but unsure whether Chapter 7 business bankruptcy is right for you? Talk to the business debt relief and bankruptcy attorneys at The Lane Law Firm. With decades of experience in business debt relief and business bankruptcy, we're here to help find the best path forward for your business. Contact us online today or book your free consultation for a time that works best for you.

 

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