Chapter 7 bankruptcy is also known as liquidation. In this liquidation process, the court appointed a trustee to dispose business assets to repay its creditors. Secured creditors get a preference over unsecured creditors while making these payments. If a small business is under pressure because of outstanding debt, Chapter 7 can be used as a legal instrument to resolve its financial obligations at personal and business level. Chapter 7 is not an apt legal measure in all situations. It varies in accordance with the nature of business.
Due to the financial contingency or bad economic situation, many small business firms are forced to file bankruptcy proceedings under Chapter 7 recently. There are several reasons that lead a small business owner to bankruptcy. Some of them are as follows:
- small business debts grow beyond what can be realistically repaid
- small business want releif from an expensive commercial lease, sales contract, or vehicle or equipment lease that prevents a profitable operation
- small business owner want to stop harassment of collection agents, creditors or bill collectors
- small business has outstanding judgment against it from a lawsuit, which it cannot afford to pay
Chapter 7 bankruptcy is often an apt solution to these problems. However, a Chapter 7 bankruptcy is not always the answer for a small business. If the small business is a sole proprietorship or a partnership, it lacks a separate legal entity and as such, the owner of the business is personally liable for such business debts and obligations. If the business has a separate legal entity such as in the case of a limited liability company (LLC) or a corporation, the owner’s liability is limited. Here, the liability of business debts are vested with such business entity and had the capacity to file a Chapter 7 bankruptcy. However, in certain cases, if the owner personally guarantees or signed for any business debts, such obligations extends to his/her personal liability.
Chapter 7 is a liquidation process and if a small business owner wants to retain any of its assets, generally, it is not possible. If a business owner wants out of his/her business, the bankruptcy court may shutdown the business. This shutdown may be temporary or permanent. Thus, many small business owners used Chapter 7 bankruptcy to eliminate their debts and subsequently started a similar business soon thereafter. Chapter 7 personal bankruptcy gives small business debtors an opportunity to eliminate some or all of their debts.