Is It Necessary to Liquidate My Business If I File for Bankruptcy?

Website Provided by

Bankruptcy could affect how a business operates after the process has finalized, and the owner may need to liquidate the company based on which type of process he or she files. Independent bankruptcy may also affect the business entity when there are no personal assets remaining to keep the company afloat in these difficult times.

Chapter 7 Bankruptcy

Personally filing for Chapter 7 bankruptcy is necessary when the individual is not longer able to cope with his or her debts. Liability is often tied to the business with personal lent monies. This could lead to a business liquidation if the owner is unable to remain solvent. There are alternatives if this person is able to sell off property or other assets. However, a Chapter 7 will end the company and cause any employees to seek work elsewhere. This liquidation process may remove most or all debts that remain after the company has been sold or closed. An agent will work with the owner and determine the best course of action and how to proceed based on all factors.

Alternatives to Chapter 7

If the owner is able to recover from personal debt through negotiation of loans and liens, he or she may keep the business afloat. This is also possible through a Chapter 11 reorganization of the company. By working closing with a bankruptcy agent over several months or years, the owner is able to pay off large debts and ensure smaller ones are more manageable. This will usually shrink the company and layoff most employees, but there is a path to revenue available. Restructuring the entity in this manner may permit the owner to keep certain assets. The business will remain active and the procedure will finalize with the company and owner solvent in most circumstances.

Business Owners and Bankruptcy

Chapter 7 is the most common form of process used for filing bankruptcy. This procedure usually wipes away most or all debts accrued based on certain factors. However, the court or bankruptcy agent or trustee sells personal and business property in return for the freedom from liability. The proceeds from sales settle the debts with collection agencies and creditors. The process often takes three to six months for completion through the court. Additional time is necessary if more factors are present. These may include businesses that need time for sale and larger assets such as real estate property.

Wiping away all debts from business arrangements depends heavily on various factors. These may include legal matters, the types of debts and how the business was originally organized. Personal assets could introduce protections in these procedures. Sole proprietorship is connected to the individual, and bankruptcy will erase both types of debts in usual circumstances. However, a corporation or limited liability company debts will remain. Personal liability is removed from these entities through a Chapter 7. Additional action is necessary in these circumstances. It is essential to hire a business lawyer to help with these processes.

Liquidating the Business

Chapter 7 bankruptcy processes initiate the sale and loss of a business. Through paying off various debts, the owner must relinquish many different assets. If a vehicle is currently behind in payments, these automobiles are generally part of proceeds provided to the creditors. To ensure that the Chapter 7 method is possible, the individual must either meet the requirements or have debts that are primarily due to the company. If over half of all monies owed are because of the business entity, the person may proceed with the process. However, if these debts are personal, other criteria affect these procedures.

Chapter 7 assumes that the applicant does not accrue enough in disposable income to pay off debts. If there is enough that some debts have repayment, the person may need to alter this to a Chapter 13 method. The means test used in these situations will determine if 7 or 13 is the correct and appropriate option. For business owners with these debts, the applicant will need to liquidate the company and use these proceeds to pay off creditors.

Legal Assistance for Business Bankruptcy

Many business owners do not want to sell off their businesses. However, if the debts accrued are primarily from the company, it is often the better choice to liquidate the entity. The debts are often wiped clean after bankruptcy, and this may permit the owner to pick up the pieces. During the process, he or she should hire a lawyer to ensure his or her rights are protected.


Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

Find a Lawyer

Find a Local Lawyer