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The Benefits of Both “Asset” and “No Asset” Chapter 7 After Closing Down a Business

Posted by on July 14, 2019 under Bankruptcy Blog | Comments are off for this article

Besides wiping out (“discharge” is the legal term) your personal debts like credit cards and medical expenses, a Chapter 7 case can discharge all or most of your personal liability from a closed sole proprietorship, corporation, LLC, or partnership.  You are liable for the debts of a sole proprietorship and a partnership.  You can be liable for LLC or corporate debt to the extent that you signed a guarantee or in other circumstances.

 “Asset” and “No Asset” Chapter 7

Chapter 7 is sometimes called the liquidation form of bankruptcy.  That usually does NOT mean that if you file a Chapter 7 case,  all of your assets will be liquidated or sold.   One of the main purposes of the Bankruptcy Code is to give an honest debt a fresh start.  You get a fresh start by the discharge of most of your debts and keeping property that is exempt.

As a debtor in New Jersey, you can choose the exemptions listed in the Bankruptcy Code (called the federal exemptions) or you can use the exemptions provided under New Jersey statutes.  Since the federal exemptions are much more favorable to the debtor than the New Jersey exemptions, almost all NJ debtors utilize the federal exemptions.  If everything you own is exempt, you would have a “no asset” case, so-called because the Chapter 7 trustee has no assets to collect or distribute to your creditors .

In contrast, if you own something that is not exempt, and the trustee decides that it is worth liquidating and using the proceeds to pay a portion of your debts, then your case is an “asset case.”

The Quick “No Asset” and the Drawn Out “Asset” Case

Generally, a “no asset case” is simpler and quicker than an “asset case” because it avoids the asset liquidation and distribution to creditors process.

A simple “no asset” case can be completed in about three to four months after it is filed (assuming no other complications arise).  An asset case can take a year or more.

The Potential Benefits of an “Asset” Case

If you have an asset case, that can be turned to your advantages.  Two situations come to mind.

First, you may decide to close down your business and file a bankruptcy immediately in order to hand over to the trustee the headaches of collecting and liquidating the assets and paying your business creditors .  If you’ve been fighting for a long time to try to save your business, you avoid the added headache and expense of negotiating work-out terms with all the creditors.

Second, in the Chapter 7 process, certain debts, called priority debts, are paid first.  General debts get paid afterwards to the extent there are available funds.  More importantly, certain priority debts are not discharged by the bankruptcy.  That means you still owe them after the bankruptcy is completed.  Examples of priority debts that are not dischargeable include child and spousal support arrearages, and certain tax claims.

So, as a debtor, you want to pay off as much non-dischargeable debts as you can.  To the extent you have non-exempt assets, the Trustee can use the proceeds of the sale of those assets to pay off some or all of your priority, non-dischargeable debts. Non priority debts (except for most student loans) are discharged regardless of whether they receive payment in the Chapter 7.