Can a Business File Under Chapter 7?
Posted by Kevin on March 3, 2018 under Bankruptcy Blog | 
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Under State law, a business entity, such as a corporation or an LLC, is considered a person and is separate from its shareholders (in the case of corporations) or members (in the case of LLC’s). If a corporation or LLC fails, it will probably have to deal with creditors who may sue the business, obtain judgments and levy on the business assets. This can be a long, drawn out procedure. As an alternative, that failed business entity may file bankruptcy. The entity will be the debtor. If the plan is to shut down the business and walk away (as opposed to a restructuring and continuation of business), then Chapter 7 can be a useful vehicle. Upon the filing, the automatic stay goes into effect as to the business entity. A trustee is appointed who literally changes the locks on the door, deals with the landlord and other creditors, assembles and liquidates the assets, and pays off the creditors.
How does a business chapter differ from a personal Chapter 7? In a personal Chapter 7, the debtor gets a discharge of many debts, and is allowed to keep a certain amount of property which is exempt. The discharge and keeping a baseline of property is part of the concept of giving the debtor a fresh start.
However, there are no exemptions for the business in Chapter 7. The trustee sells everything. I could understand that concept because if you are going out of business, you do not need assets for a fresh start. However, in Chapter 7, the business entity does not get a discharge. I always thought that was strange and looked at the legislative history behind this rule. The legislative history stated that discharges are not given to corporations (there were no LLC’s back then) so that people could not traffic in corporate shells??? My initial thought was, it only costs a few hundred dollars to set up a new corporation with no debt. So, why traffic in corporate shells? More history. It was only about 100 years ago that state legislatures passed business corporation statutes like the one’s we have today. Before that, if you wanted to incorporate, you would have to get your local State representative to sponsor a bill to establish your corporation. The legislature actually voted on it. It was an expensive and time consuming activity. Not surprisingly, there were not that many corporations. So, back in the day (as my kids would say) discharging debt within a corporation through bankruptcy could conceivably lead to a lucrative side deal if you were allowed to sell the debt free entity to a third party.
The bottom line is that business entities can file under Chapter 7. However, business Chapter 7’s tend to be more complicated because assets are involved, and the Trustee is usually more involved than in personal Chapter 7’s. If you are the owner of a failing business, it may be a good idea to consult with an experienced bankruptcy attorney.
