BUSINESS
BANKRUPTCY: CHAPTER 7
If Your Business Is In Debt and You Do Not Believe that the Debts Can Be Paid Back, Business Bankruptcy May Provide A Solution
BRIAN LEE
BANKRUPTCY ATTORNEY IN WASHINGTON DC, VIRGINIA and MARYLAND
Operating a business is a risky financial choice as many new businesses fail. A tough economy and a difficult regulatory climate can result in many businesses falling into serious financial trouble. If your business is in debt and you do not believe that the debts can be paid back, business bankruptcy may provide a solution. There are different Chapters of the bankruptcy code that a business can file under, including Chapter 7. It is important that you understand the impact of a Chapter 7 bankruptcy on the ability of the business to continue operations. It is also important that you understand that a Chapter 7 business bankruptcy can, under some circumstances, have an impact on your personal credit and assets as well as on the financial situation of the business. An experienced bankruptcy attorney can assist struggling business owners to make the right choices so that the desired outcome can be achieved and so the business can find debt relief.
CHAPTER 7 BUSINESS BANKRUPTCY Chapter 7 is referred to as “total liquidation� bankruptcy. This Chapter of the bankruptcy code gets this name because the majority of assets must be liquidated during the bankruptcy process.
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Unlike other Chapters of the bankruptcy code, such as Chapter 11, Chapter 7 does not generally allow a business to remain operational. When you file for Chapter 7 bankruptcy for your business, the equipment and any profitable assets, including intellectual property patents, typically become a part of the bankruptcy estate. Profitable assets can be sold and the money that is generated from the sale can be used to repay some of the creditors that the business owes money to. With its assets sold, the business typically shuts its doors at the end of the Chapter 7 process. Any remaining debts that are eligible for bankruptcy are forgiven, and the business no longer continues to owe money or have obligations to creditors.
CHAPTER 7 AND YOUR BUSINESS STRUCTURE When considering a Chapter 7 bankruptcy for your business, it is imperative that you understand how your business structure will affect your filing. Businesses may be organized in a number of different ways including as sole proprietorships; partnerships; limited liability companies; and corporations. When a business is organized as a sole proprietorship or a partnership, the owner(s) of the business have their own assets intermingled with those of the business and the owners/business are considered the same legal entity. For example, if you run a business as a sole proprietor, you are the business in the eyes of the law. The business does not file a separate
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tax return and you do not have to keep your finances separate from the business. While you may have a separate business bank account that you use only for the company, the law is not going to see a material difference between the assets in your personal account and the assets in your business account. Any debts that the business incurs are also considered to be your personal debts. This means that if you file for a business bankruptcy as a sole proprietorship, the bankruptcy is the equivalent of you filing for personal bankruptcy. Your own personal assets must become part of the bankruptcy estate and sold unless they fall within one of the exemptions, such as those that exist for home equity or retirement accounts. Your personal debts, of course, can also be forgiven as well as a part of the filing. If your business is a corporation, on the other hand, then the business is an entirely separate legal entity in the eyes of the law. The business files its own tax return and when the business files for bankruptcy protection, your personal assets are not generally affected unless you had signed personal guarantees for the business debt.
Business Bankruptcy: Chapter 7
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Because a business bankruptcy can sometimes have such a profound effect on your personal financial situation, it is advisable to consult with an experienced business bankruptcy lawyer before you make the decision to file for bankruptcy protection. If you are a sole proprietor and your income is above a certain level, you may not even be eligible for a Chapter 7 business bankruptcy as a result of a means-testing requirement instituted as part of bankruptcy reforms in 2005.
OTHER ALTERNATIVES While a Chapter 7 business bankruptcy has the advantage of wiping out all eligible debts that the business owes without requiring any additional debt repayment, it also has some disadvantages. The sale of the business assets can sometimes be a significant downside, especially if some of the assets are profitable and the business is simply being dragged down by a few bad debts. The fact that a Chapter 7 typically means the business shuts its doors is also a disadvantage to someone who wants help with debts but who does not want to cease operations.
Business Bankruptcy: Chapter 7
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Alternatives to a Chapter 7 business bankruptcy exist, including Chapter 11 or even Chapter 13 under certain circumstances. An experienced bankruptcy attorney can help you to determine which Chapter of the bankruptcy code is the right one for your business, so don’t hesitate to get in touch with a legal professional today.
Business Bankruptcy: Chapter 7
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About the Author Brian Lee Serving clients in the Washington, DC metropolitan area since 2005, attorney Brian Lee is licensed to practice law in the state and federal courts of Virginia and D.C. and federal courts in Maryland. Brian provides client-oriented legal counsel to individual clients, partnerships, and businesses on a wide variety of complex legal and financial issues. He is a graduate of RutgersUniversity in New Jersey and George Mason University School of Law.
About Lee Legal With offices in Dupont Circle, Bethesda, and Old Town Alexandria, Lee Legal serves bankruptcy and litigation clients in Washington, D.C., Virginia, and Maryland. Lee Legal provides reasoned, comprehensive bankruptcy and litigation representation. Every client gets a free initial consultation. Founding attorney Brian Lee is the District of Columbia Chair for the National Association of Consumer Bankruptcy Attorneys, a national advocacy organization dedicated to the protection of the rights of consumer bankruptcy debtors. If you are facing financial difficulty or litigation, call (202) 448-5136 in for a free consultation.
Business Bankruptcy: Chapter 7
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