Can a Business File for Chapter 7 Bankruptcy


Chapter 7 bankruptcy, most frequently used by individual debtors, is also available to businesses. Often referred to as “liquidation bankruptcy,” Chapter 7 is available to partnerships, corporations, or other forms of business. While these business debtors might prefer to stay in business and file for reorganization and repayment of debts under Chapter 13, Chapter 7 is an option for them. This, however, means the end of the business.

Unlike under Chapter 13, Chapter 7 contains no provisions for a debtor to file a plan of repayment. Individual debtors must pass a means test based on income, but otherwise they can find relief under Chapter 7 regardless of how much they owe or whether they are insolvent. Chapter 7 simply provides that a bankruptcy trustee will liquidate and distribute non-exempt assets among creditors.

The court appoints that trustee, who sells the debtor’s nonexempt assets and uses those funds to pay the creditors under the methods set forth in the bankruptcy code. This means a debtor under Chapter 7 is likely to lose some property—but a good bankruptcy lawyer may exempt important assets, and a Chapter 7 bankruptcy discharges almost all debts.

If the debtor has assets that are subject to security liens, such as property mortgages, those debts may require the sale of the secured properties to satisfy the liens or mortgages. Secured creditors, such as the lenders for automobile loans and home mortgages, have collateral for their loans (the car or house) and are first in line. If the car or house is sold, the lender for that asset gets the proceeds.

A debtor, however, can keep secured property, such as a car or home, by reaffirming the debt before discharge. In the case of a home, the debtor must exempt equity in the house. State law sets that amount.

The situation is slightly different for a business. A partnership, limited liability company, or corporation is allowed to file for bankruptcy under Chapter 7. These businesses, however, are legally separate from their owners, and they file their own petitions. Business entities receive no asset exemptions. The bankruptcy trustee would liquidate the company’s assets to satisfy—to the extent possible—the company’s debts. That liquidation is, essentially, the end of the business.

A business operating as a sole proprietorship, however, is basically the personal property of the debtor, and thus someone owning a sole proprietorship can file a personal bankruptcy case under Chapter 7. Depending on how many assets the sole proprietorship can exempt from liquidation, the owner may continue the business even after a Chapter 7 bankruptcy.

If You Are Considering a Business Bankruptcy in Salt Lake City, Call Bankruptcy Attorney Jory L. Trease of JLT Law to Discuss Your Options

If your business is having financial difficulties and you are considering filing for bankruptcy, you need to make the bankruptcy laws work for you. You might continue to operate your business after bankruptcy. Take advantage of a free case evaluation to determine how bankruptcy can help you. You can contact me at (801) 797-2098 or through my online contact form.