September 20, 2019

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Filing a Chapter 7

Chapter 7 business bankruptcy is a potential option for a business that cannot meet all of its debt obligations. Chapter 7 takes much less time, energy and expense than a Chapter 11 business bankruptcy, but filing a Chapter 7 also usually indicates the end of your business.

Five Steps Involved in Filing a Chapter 7 Business Bankruptcy Petition

  1. File the petition
  2. Automatic stay is triggered
  3. A trustee is appointed by the bankruptcy court
  4. The business’s assets are liquidated by the trustee
  5. The trustee disburses the proceeds from the sale of business assets to creditors according to priority order

Keep in mind that the trustee’s job is to make sure the interests of the creditors are served. The trustee will aim to receive as much as possible in proceeds from the sale of assets in order to pay off the creditors. Your business bankruptcy attorney, if you have one, will make sure that every asset that may be exempt from the liquidation is in the exempt category. Every state has laws that govern which property may or may not be exempt.

Categories of Creditors

The difference between secured and unsecured creditors is a big deal in business bankruptcy. Any mortgage or loan secured by collateral (e.g. a company vehicle) is a “secured debt.” Other debts, such as the utility bill and credit card debts are unsecured.

A secured creditor is given priority in the bankruptcy proceeding. In a Chapter 7 business liquidation the secured creditor is given back the collateral and/or given proceeds from selling of the business assets. Only if there is money still remaining will an unsecured creditor be paid.

Under Chapter 11, your business reorganization plan must show that the secured creditors will be paid first and paid off fully while the debts of unsecured creditors may be reduced or eliminated.

What is an Automatic Stay?

Immediately upon filing a bankruptcy petition your business will be protected from creditors through what is called an “automatic stay.” The stay prohibits creditors from taking any collection action against your business (phone calls, letters, etc.). The purpose of the automatic stay is to give the business temporary freedom from creditors in order to determine a plan on how to get ahead of its financial debts.

How Will Filing a Chapter 7 Business Bankruptcy Impact Your Personal Credit?

Filing for business bankruptcy will likely not impact your personal credit because a business corporation is its own entity in the eyes of the law. That being said, many small business owners are asked to personally back their business loans. If you personally signed for any of your business loans or lines of credit, your personal credit report may be impacted by the bankruptcy of your business.  A Chapter 7 bankruptcy can show on a credit report for ten years.