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Chapter 7 Bankruptcy for LLCs and Corporations

Chapter 7 of the Bankruptcy Code provides liquidation procedures for the debtor’s nonexempt property and disburses the return to the creditors.  In a Chapter 7, the bankruptcy court appoints a bankruptcy trustee who collects the list of nonexempt real assets from the debtor and sells these assets in accordance with bankruptcy provisions.  After the disposal or sale of these assets the bankruptcy trustee prioritizes the claims of creditors and disburses the amount among the creditors in accordance with Chapter 7 bankruptcy provisions.

Filing for Chapter 7 bankruptcy is a practical opportunity for corporations and limited liability companies (LLCs) that are going out of business.  The incorporation of a corporation or a LLC gives them a separate legal entity status.  The owner of a corporation or a LLC is its shareholders or members.  A corporation or a LLC holds its own assets and liabilities that are distinct from those of its owners.  So, the corporations and LLCs are liable for their own business debts.  In general, the owners of a corporation or LLC are not personally liable for any business debts.  However, in certain circumstances, the owners are personally liable if they personally consign or guarantee their assets as collateral for a corporation’s or LLC’s business debts.

According to Chapter 7 bankruptcy, the corporations or LLCs are not eligible for a discharge.  Chapter 7 bankruptcy is designed to liquidate a corporations’ or LLCs’ assets and disburse its financial obligations.  Generally, there is no option to retain or exempt any assets of the corporation or LLC in Chapter 7 liquidation.  When a corporation or LLC files a Chapter 7 bankruptcy, the bankruptcy court appoints a bankruptcy trustee to sell off its assets and disburse its creditors.  It is a time bound process by the bankruptcy trustee.

If the owner of a corporation or LLC guarantees his/her personal assets as collateral for the business debts, the creditors can claim their amount from owner’s personal property if they are not fully satisfied with the liquidation of business assets.  In such situations, the owner of a corporation or LLC can file Chapter 7 for personal bankruptcy to wipeout his/her personal liability for business debts.

The scheme of Chapter 7 bankruptcy is to shutdown or finish a corporation or LLC and there is no room for any reorganization.  If the owners of a corporation or LLC settle the business debts by their own efforts, they can gain a better price for the business assets.  Moreover, if there is a personal liability on business debts by the owner, s/he can negotiate for a better offer with the creditors to settle all the debts at a lower rate.

Inside Chapter 7 Bankruptcy for LLCs and Corporations