Chapter 7 bankruptcy for businesses

Chapter 7 is traditionally associated with personal bankruptcy filings. However, in some cases, businesses can file for Chapter 7. It depends on how the business is structured.

Sole proprietorships are considered legal extensions of their owners. However, Chapter 7 can also be an option for partnerships and corporations. Sole proprietorships may also file for Chapter 13, which is also most often associated with personal bankruptcy. Let’s look at Chapter 7 business bankruptcy.

This is a liquidation. It may be the best option for the owner if they don’t see a future for the company. It’s often used when the company has no assets and the debts are so great that the company can’t be restructured. If an owner isn’t able to keep the business afloat, they likely aren’t going to be able to successfully restructure it.

As with a personal filing, when a business files for Chapter 7, the bankruptcy court appoints a trustee. That trustee takes possession of the business’s assets and distributes them among its creditors. Once that is completed, the bankruptcy is discharged if the business is a sole proprietorship, so the owner is no longer responsible for the debts. Since corporations and partnerships aren’t legal extensions of the owner, there is no discharge.

If you’ve built a business from scratch, you’ve put considerable time, money and work into it. Filing for bankruptcy is a big step. However, it may be a necessary one. An experienced bankruptcy attorney can provide valuable guidance as you make your decision. If you proceed with the filing, they can help the process go more smoothly and protect your rights.