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Should I Put My Business in Chapter 7?

Posted by Kevin on September 9, 2017 under Bankruptcy Blog | Be the First to Comment

You wanted to follow the American dream and set up your own business.   Two years down the road, however, you realize that you are working 70 hours per week and the business is not making money.  You have exhausted all your savings and the business has incurred debt out the wazoo.  You just want out, and you have heard about Chapter 11 or Chapter 7.  What to do?

While you can liquidate your business in a Chapter 11 (liquidating plan), this is very expensive and time consuming.  Unless, the business is very large, this may not be the way to go.  But what about a Chapter 7?

The first question you have to answer is who (or what) is going into Chapter 7?  To a degree, it may depend on how your business was set up.  If you have a sole proprietorship (DBA), then under the law of New Jersey, you are the business.  So, if the business fails and you want out, you will have to file a Chapter 7.  A trustee will be appointed and will administer not only your business assets and liabilities, but also your personal assets and liabilities.

If the business is a corporation or LLC, then under the law, the business is considered an entity separate and apart from you.  So, now the issue is who files bankruptcy?  One of the primary reasons to file bankruptcy is to get a discharge of your debts.  However, the Bankruptcy Code states that a discharge in a Chapter 7 is limited to individuals.  The Code defines “individuals with regular income” but not “individuals”.  The Code also defines “persons” which includes people but also includes corporations and partnerships.  Well, without going into too much more detail, the bottomline is that people can get discharged in a Chapter 7 but corporations and partnerships and LLC’s cannot.  So, if you put your LLC into Chapter 7, it does not get a discharge.

But, the analysis does not end there.  Your LLC may be have sued by numerous creditors so you have lawsuits pending.  Also, these creditors have a penchant for not only suing the LLC but suing the principal and that is you.  You have other creditors who have not sued yet but are hounding you on phone.  You have inventory and accounts receivable.  You have the bank pressuring you on that line of credit which you guaranteed.

Even though the LLC does not get a discharge in Chapter 7, it may be worthwhile to file a Chapter 7 for the business.  First of all, because of the automatic stay, all pending lawsuits are put on hold, and your creditors cannot file any new actions unless they get the permission of the bankruptcy court (relief from automatic stay).  Also, the trustee takes over and chases the business’s creditors, deals with the landlord and liquidates the inventory.  You must cooperate, but the trustee does the heavy lifting.

If you cannot work a deal out with lenders on guarantees, or if the collection lawsuits naming you become too much of a hassle, then the owner should seriously consider an individual Chapter 7.

Bankruptcy issues involving a failing business are complicated.  You should seek experienced bankruptcy counsel work work you through the process.