If a small business owner fails to meet his/her business debts, there are two options, i.e., the owner can reorganize the business debt and continue the business or s/he can close the business and liquidate its assets.
Chapter 7 bankruptcy is also known as liquidation proceedings where the trustee sells off all the nonexempt real property of the business and disburse the proceeds among the creditors. It enables the small business owner to a fresh start by wipeout all personal obligations of business debts and eliminate all or some of business debts through liquidation. In other words, Chapter 7 bankruptcy proceedings can help a business owner to continue or shutdown his/her business.
There are several factors that influence the continuance or shutdown of a small business. If the business consistently results in loss to the business owner and there is no feasible way to make gain out of it, it may be the right time to stop that business. However, certain profitable business have hard times due to certain temporary factors and it may be advisable to retain that business. In certain situation, the business debts of a business are greater than its business assets and if there is no other way to pay off all the debts, there is no worth in saving that business. If the small business has large outsanding business debts and the owner is personally liable to all that debts, it may be more advantageous to retain the running of the business. Otherwise, the creditors may claim their money from the personal assets of the business owner.
In the case of a sole proprietorship, Chapter 7 bankruptcy eliminates both personal and business debts of a defaulted sole proprietor. Moreover, Chapter 7 allows certain exceptions to retain real assets of the business owner. Therefore, Chapter 7 is an attractive offer for a sole proprietor with insufficient or no real assets to wipe out the business debts and keep the business running. However, if the business owner has nonexempt assets, the bankruptcy trustee sells off and disburses the proceeds among the creditors. Therefore, it is not a good option for the business owner at this juncture.
If the business owner owns a business with separate legal entity such as partnership, corporation, or limited liability company (LLC), Chapter 7 is not an apt option if s/he wants to continue the business. In separate legal entity business, Chapter 7 provides no exemptions to real property. The bankruptcy trustee disposes all the business assets to disburse the proceeds among the creditors in accordance with priority and closedown the business.
Generally, Chapter 7 bankruptcy is used to shutdown a business forever. A Chapter 7 bankruptcy trustee is appointed to liquidate all business assets. Chapter 7 bankruptcy is often the reasonable solution for small and family-owned businesses, since personal and business debts are often mixed. If the business owner has difficulty in separating business debt from personal debt, Chapter 7 might be one of the best options that fetch a financial relief.