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The Basics of Chapter 7 Bankruptcy for Businesses

Every business owner begins with the intention of succeeding. However, things don’t always go as expected, and sometimes businesses fail. When this happens, one of the most important steps a business owner can take is to make a plan for exiting the struggling venture. Chapter 7 bankruptcy can offer relief to businesses that are ready to close their doors.

The bankruptcy process is designed to help a business eliminate or repay its debt under the guidance and protection of the bankruptcy courts. Business bankruptcies take the form of either liquidations or reorganizations. Chapter 7 bankruptcy is a liquidation and involves dissolving the business and selling off all its assets to pay creditors. Under Chapter 7, companies are not eligible for exemptions, so everything from intellectual property to real estate and furniture is sold.

While sole proprietorships, partnerships, corporations and limited liability companies can all apply for Chapter 7 relief, it may not be the best option available. Chapter 7 is for businesses with debts that are so substantial that restructuring is not practical or for business owners who no longer desire to remain in business.

The business, known as “the debtor,” must file a petition with the bankruptcy court to begin the bankruptcy process. In addition, the debtor must also file all necessary paperwork, such as schedules of assets and liabilities, monthly income, monthly expenses and a statement of financial affairs.

Sole proprietors filing for Chapter 7 need to pass the “means test” to qualify. The bankruptcy court uses this test to restrict filers from using Chapter 7 unless they genuinely cannot pay their debts. The amount of a sole proprietor’s disposable income will drive whether or not they will be allowed to proceed under Chapter 7. Otherwise, Chapter 13 or Chapter 11 bankruptcy may be an alternative option.

Some benefits of Chapter 7 include shifting the burden of dismantling the business to the trustee. Additionally, a Chapter 7 makes it clear that the company has ceased operations and was closed legally through the courts.

Disadvantages include the risk that the trustee’s effort to sell assets and settle debts results in a less favorable outcome than what might have been achieved on their own.

Another disadvantage is that partnerships, limited liability companies and corporations do not receive a discharge of debts in Chapter 7. Therefore, any debts backed by a personal guarantee remain the guarantor’s responsibility, and creditors may still demand payment.

The bankruptcy attorneys of Anker Law Group, P.C. in Rapid City, South Dakota help clients file for bankruptcy relief. Our firm has extensive experience handling personal, business and farming bankruptcies. To schedule a free initial consultation with a member of our legal team, call 605-519-5967 or contact us online.

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