Sometimes businesses just fail. The debt can become overwhelming and creditors can begin exercising their rights for repossession of equipment (leased or financed), levies on bank accounts, and enforcement of personal guarantees against the business’ shareholders/members. An insolvent business has two bankruptcy options: Chapter 11 and Chapter 7.
Chapter 11 is a good option for businesses looking to restructure their debts under a plan of reorganization, while continuing to operate during that process. Chapter 7 is a good option for businesses who choose to close, liquidate their assets, and dissolve the corporate structure.
The Good and the Bad
An incorporated business (i.e., Inc. or LLC) is a separate legal entity with separate assets and liabilities from the shareholders or members that own or operate the business. The liabilities of the business may not be distinct if the shareholders or members sign personal guarantees for the debts. In such a situation, the business and the shareholders/members would likely have to file for bankruptcy protection. If only the business files for bankruptcy, the business creditors could still pursue the shareholders/members for liability under personal guarantees (if there were any).
A Chapter 7 business bankruptcy can help the business owners “wind up” the business. Winding up is the process of selling business assets, to pay off creditors, and disburse remaining assets amongst the business owner(s). Within a bankruptcy context, the trustee would handle this duty. In a personal Chapter 7 bankruptcy, an individual is able to exempt a certain value in their property, thereby keeping it and preventing the property from being liquidated. Since Chapter 7 business debtors are not able to claim exemptions, the Chapter 7 trustee will liquidate all of the assets. In addition, the business can no longer operate from the moment the Chapter 7 is initiated.
Since all of the business assets are under the control of the Chapter 7 trustee, a business owner who wants to retain some level of control should speak to a New Jersey business bankruptcy attorney about options other than a chapter 7 bankruptcy. This is especially true in situations where debt is personally guaranteed,.
Discharge of Debt
A Chapter 7 business debtor is not eligible for a discharge pursuant to 11 U.S.C. §727(a)(1). A discharge is a court order, issued at the end of a successful bankruptcy proceeding, that acts as a statutory injunction against the commencement or continuation of an action to collect, recover or offset a debt as a liability of the debtor. Section 727(a)(1) of the Bankruptcy Code states, “The Court shall grant the debtor a discharge, unless the debtor is not an individual.”
As previously discussed, just because the business is not eligible for a discharge, does not mean there is no point in filing a business Chapter 7 bankrupcty. The business may have a large number of creditors and the bankruptcy process may make it easier to administer business assets. The business may also have certain debt that they would want paid first, such as tax debt. The Bankruptcy Code creates an order (or priority scheme) determining which creditors would get paid first from the liquidation of assets. Certain obligations, such as trust, withholding, and sales tax, often fall on the shoulders of those persons whose responsibility it is to pay these obligations on behalf of the company in the event the business cannot. Therefore, in order to minimize personal liability, oftentimes shareholders/members would much rather have the business assets liquidated in a Chapter 7 bankruptcy so that taxes are paid before other types of debts..
Business Chapter 7 Bankruptcy Help
If your business is considering a potential bankruptcy, we may be able to help. It is imperative that you retain a qualified bankruptcy attorney to navigate the business through this process. Please give us a call for a free consultation. We have office locations in Wayne, Hoboken, Newark, and Hackensack.
Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.