Should My Business File Chapter 7 Bankruptcy?

May 11th, 2010 by Reed Allmand

While individual debtors have the right to file Chapter 7, Chapter 11 or Chapter 13 bankruptcy, corporations and LLC’s only have the right to file Chapter 11 bankruptcy or Chapter 7 bankruptcy.  While we often hear of companies filing Chapter 11 bankruptcy, we don’t often get to see the inner workings of a corporate Chapter 7 bankruptcy aka liquidation.  But many business owners often consider Chapter 7 bankruptcy because they believe it may be easier or more suited for their business especially if they don’t plan to continue operating that business.  Below are a few reasons why a Chapter 7 bankruptcy may be beneficial to some businesses.

1. The business considering bankruptcy has some assets and they also owe taxes, such as trust fund taxes–withholding taxes or sales taxes.  Oftentimes if taxes are not paid by a business, the tax authority will go after the individual owners of the business.  If a business files for Chapter 7 bankruptcy, once their assets are liquidated, the taxing authorities will receive priority payment reducing the individual business owners’ liability for the debt.
2. Filing for Chapter 7 bankruptcy can decrease the chances that individual business owners will be sued by creditor. And since the bankruptcy trustee will oversee and approve/disapprove of distributions to the creditors, there is the increased chance that creditors will feel that they’ve received equitable treatment during the bankruptcy. 
3. If a debtor has many creditors and does not intend to continue operating their business, filing for Chapter 7 bankruptcy may be the best decision.  One of the drawbacks of having a lot of creditors is that someone is bound to feel that they did not receive their fair share.  But as we have mentioned above, having a third party (bankruptcy trustee) make the final decision on how creditors will be paid decreases the chance that creditors will become litigious after the bankruptcy is closed.