How Does Chapter 7 Bankruptcy Work for Partnerships, LLCs, and Corporations?

If you are an owner, member, or shareholder in a business that is planning to file for Chapter 7 bankruptcy, you likely have a wide range of questions and concerns about how the case will work and how you will be impacted. It is important to recognize that partnerships, limited liability companies (LLCs), and corporations all have different business structures, and thus must meet different requirements for closing and ceasing business activities when filing for Chapter 7 bankruptcy. At the same time, all three of these types of business structures have an important thing in common when it comes to bankruptcy filings: they are all entities that are distinct from their owners. This fact has important implications for business owners.

Businesses Can File for Chapter 7 Bankruptcy 

Like individuals, businesses that are structured as partnerships, LLCs, and corporations can file for Chapter 7 bankruptcy. While some of the steps and elements of the bankruptcy case will be similar to an individual filing, others will be different.

Company Assets Are Liquidated 

All business assets will be liquidated so that creditors can be repaid in order of priority.

No Bankruptcy Discharge 

Unlike in individual Chapter 7 bankruptcy cases, partnerships, LLCs, and corporations do not receive a debt discharge, and the business’s debt will remain after the business assets are liquidated and the business is closed. Why is there no discharge? In short, there is no need for a discharge: since there is no entity remaining (remember, owners and stakeholders are separate entities from the business), there is no entity from which creditors who are still owed debt can collect.

Individual Owners Are Not Liable (Usually) 

Generally speaking, individuals who are part of partnerships, LLCs, and corporations are not personally liable for business debts, and creditors of remaining debt cannot attempt to collect from those individuals. However, if any personal guarantees were signed, then the individual who signed the personal guarantee can be liable for remaining business debts. There are some other circumstances in which this can also occur, although those circumstances are less common.

Discharges Are Possible for Sole Proprietorships 

It is important to be clear that Chapter 7 cases filed by partnerships, LLCs, and corporations are distinct from Chapter 7 cases filed by sole proprietors (or sole proprietorships) because the former are all separate entities from the owners, while the sole proprietors and their sole proprietorships are not separate entities for bankruptcy and other legal purposes.

Accordingly, Chapter 7 cases filed by sole proprietors are eligible for discharge. In this kind of Chapter 7 case, the assets and debts of the individual business owner as well as the business will be part of the bankruptcy case, and the debtor may be eligible to receive a discharge. To determine your eligibility for a Chapter 7 discharge when you own a small business, it is essential to discuss the specific facts of your case with an experienced bankruptcy attorney

Contact Our West Palm Beach Bankruptcy Lawyers Today 

Do you own a business and are considering a Chapter 7 bankruptcy filing? Understanding the distinctions between Chapter 7 bankruptcy cases for individual versus businesses can be complex and often confusing, but one of the experienced West Palm Beach bankruptcy attorneys at Kelley, Kaplan & Eller can assist you from the very start of your case. When you are planning to close a business and file for Chapter 7 bankruptcy, it is critical to have a lawyer on your side to assist you with the varied requirements of the case. Contact us today to discuss your options and to begin preparing for your Chapter 7 bankruptcy filing.

Source:

law.cornell.edu/uscode/text/11