In the case of a corporation or LLC (limited liability company), the filing of a Chapter 7 bankruptcy case means that the business will not be permitted to continue its activities. The Court will appoint a Bankruptcy Trustee, who will literally shut down the business.
In most cases, however, the business has already closed or the owners are contemplating closure. What then are the benefits of filing for Chapter 7 relief? Although there are non-bankruptcy alternatives (Dissolution of Corporation) available, many business owners will simply file a Chapter 7 petition if they determine that their business is no longer viable and it has too much debt.
The strange part of a corporate Chapter 7 filing however is that a corporation or LLC will not receive a discharge of debts at the conclusion of the case. A “discharge” is a formal Order of Court from the Bankruptcy Court that wipes out the applicable debts. This is the type of order that an individual would receive if he or she successfully completes a Chapter 7 or Chapter 13 bankruptcy case filing.
What then is the benefit of a corporate Chapter 7 bankruptcy? Simply put, the fact that all of the creditors are notified means that they are put on notice about the fact that the business has closed and that they should cease all collections activities. In fact, the Chapter 7 filing will force the creditors to instead deal with the Court Trustee and the bankruptcy attorney of the corporation.
If there are any available assets of the corporation, then the Court Trustee will sell those assets and distribute the proceeds to the creditors. The Trustee will also ensure that all tax returns have been filed by the corporation.
One of the biggest issues however with the filing of a business bankruptcy is whether or not the owner of the company has personally guaranteed any of the debts of the corporation. That will be the subject of a separate blog posting.
6 Comments on “What happens when a corporation or LLC files a Chapter 7 bankruptcy case?”
Im buying a car from a dealership that has filed for chapter 7 so what does that mean for me
Robert, thanks for your question. If this is a corporation, then the Chapter 7 would have (or should have) caused them to stop doing business. So, it’s pretty odd. Honestly, I would discourage you from pursuing this car purchase.
I’m a note holder of an LLC that has gone through a Chap 7 and a final decree has been issued by the BK Judge. Has my debt been discharged? Does the LLC still technically owe me my principal?
Brad, This is a good question and the answer might surprise some people. When an LLC or corporation files a Chapter 7 case, their debts are actually not discharged. Only an individual filing for bankruptcy is able to receive a discharge order (which wipes out their debts). Instead, a corporation that files a Chapter 7 is basically defunct and is unable legally to continue to operate. The Chapter 7 Trustee assigned to the case will administer the assets of the LLC or corporation. To “administer” the assets means that the Trustee will attempt to ascertain the value of the assets and if they are significant, then he/she will sell them, and use the proceeds to pay the creditors on a pro rata basis. I suppose that your question will be whether to continue efforts to try to collect on your note. You should discuss that with a local bankruptcy attorney, but I would imagine that they will tell you that unless you can provide some evidence that the company is still operating or that their were undisclosed assets, then you may be wasting your time.
Hi, unfortunately I need to shut down my business. I’m unable to sustain it due to personal health circumstances. The company has a disaster relief loan which we took during the pandemic. I need to know what my options are. My business is a C corp. thanks
Okay, the first question is whether you personally guaranteed the disaster relief loan. You will want to locate the loan agreement. In general, the SBA was requiring all EIDL loans more than $125,000 to be personally guaranteed at the time. I have seen a few loans of more than $125k however that were not personally guaranteed. So, if you personally guaranteed this loan, then you will need to consider a plan of action to deal with this debt personally as well. The concept here is that if the corporation files bankruptcy, the SBA will still be able to come after you personally if you guaranteed the loan. Second, you need to look at all of the assets and liabilities of the corporation. For example, is there a way to wind down and dissolve the corporation without filing bankruptcy? But these discussions are going to take time and are well beyond the scope of this brief answer. Thanks.