What happens when a corporation or LLC files a Chapter 7 bankruptcy case?

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.

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