Small Business Bankruptcy Basics: Understanding Chapter 7 Bankruptcy

If your business has been operating in the red for months or years on end, it may be time to consider bankruptcy. Generally speaking, there are two bankruptcy options for small businesses that are considering bankruptcy: Chapter 7 and Chapter 13. Some small businesses may also want to consider Chapter 11 bankruptcy, but that particular type of bankruptcy is often better suited for large companies.

With Chapter 11 or 13 bankruptcy, you can reorganize your debts so that your business can continue to operate after dealing with those debts. With Chapter 7, on the other hand, your company essentially liquidates all of its assets and shuts its doors. Below are some need-to-know considerations for those contemplating Chapter 7 bankruptcy for their small business:

1. There is No Coming Back from a Chapter 7 Bankruptcy Unless…

Chapter 7 bankruptcy is a liquidation. That means that you will be selling all of your business’s assets to pay creditors and then shutting your doors for good.

However, if you are operating as a sole proprietorship, there is no real distinction between you and your business. In many situations, that means that you can file for Chapter 7 bankruptcy, wipe out most of your debts, and then continue operating your business. These cases can be tricky, so it is important that you call us at (248) 246-1166 to schedule a consultation about your particular situation. This should not be something that you try to do yourself!

2. Your Business’s Chapter 7 Bankruptcy Will Not Affect Your Personal Obligations

Many small business owners will personally guarantee their business-related debts. If your business files bankruptcy, those guarantees will usually remain intact. The lender’s only remaining recourse regarding that particular liability after a Chapter 7 bankruptcy is against you personally. That means that you can expect the lender to come knocking at your door if you do not work something out.

In situations that involve partnerships, for example, the partners may still be on the hook for certain debts, even after the partnership goes through a liquidation. This is because although a partnership is technically a separate legal entity, it is a pass-through entity, which usually means that the partnership’s debts are your debts as well.

3. Businesses Do Not Receive Discharges with Chapter 7 Bankruptcy

Chapter 7 bankruptcy is designed to be an orderly liquidation. However, unlike personal bankruptcies, business Chapter 7 liquidations do not come with a discharge attached. There are also no exemptions allowed as there would be in a personal bankruptcy.

If a business were to receive a discharge, it could theoretically start right back up after the bankruptcy and continue as if nothing happened. That type of benefit to businesses would create a serious disadvantage to creditors. Instead, a company essentially ceases to exist after it goes through Chapter 7 bankruptcy.

If you are considering any kind of bankruptcy for your business, talk to our experienced bankruptcy team first, or call (248) 246-1166 today to schedule an appointment.