While individual debtors have the right to file Chapter 7, Chapter 11 or Chapter 13 bankruptcy, corporations and LLC’s only have the right to file Chapter 11 bankruptcy or Chapter 7 bankruptcy. While we often hear of companies filing Chapter 11 bankruptcy, we don’t often get to see the inner workings of a corporate Chapter 7 bankruptcy aka liquidation. But many business owners often consider Chapter 7 bankruptcy because they believe it may be easier or more suited for their business especially if they don’t plan to continue operating that business.
Reasons why a Chapter 7 bankruptcy may be beneficial to some businesses:
- The business considering bankruptcy has some assets and they also owe taxes, such as trust fund taxes–withholding taxes or sales taxes. Oftentimes if taxes are not paid by a business, the tax authority will go after the individual owners of the business. If a business files for Chapter 7 bankruptcy, once their assets are liquidated, the taxing authorities will receive priority payment reducing the individual business owners’ liability for the debt.
- Filing for Chapter 7 bankruptcy can decrease the chances that individual business owners will be sued by creditor. And since the bankruptcy trustee will oversee and approve/disapprove of distributions to the creditors, there is the increased chance that creditors will feel that they’ve received equitable treatment during the bankruptcy.
- If a debtor has many creditors and does not intend to continue operating their business, filing for Chapter 7 bankruptcy may be the best decision. One of the drawbacks of having a lot of creditors is that someone is bound to feel that they did not receive their fair share. But as we have mentioned above, having a third party (bankruptcy trustee) make the final decision on how creditors will be paid decreases the chance that creditors will become litigious after the bankruptcy is closed.