When is a Chapter 7 bankruptcy right for your business?

When your business bank account is light and credit collectors are knocking at your door, it might be a good time to consider bankruptcy. If your business has no real financial future, Chapter 7 bankruptcy might be right for you.

A Chapter 7 bankruptcy allows for an orderly liquidation when the debts against the business are so overwhelming that restructuring the debt is not a viable option.

How Chapter 7 bankruptcy works

Chapter 7 is sometimes called a liquidation bankruptcy. The court appoints a trustee who administers the assets of the business, and sells any that they can to distribute the money to creditors. Unlike an individual, a business does not receive a discharge of debt in chapter 7.

A business can also liquidate under chapter 11. A chapter 11 liquidating plan allows the business owner to remain in control and sell assets to pay creditors. However, in most cases, a chapter 7 makes more sense to accomplish the same goal. Chapter 11 may be the better option, for example, if the value of the assets can be better maximized by the owner, and the sale proceeds would be more than enough to pay all debts.

Before you file for Chapter 7 protection, you need to gather financial documents such as bank statements, loan documents, credit card statements and pay stubs as well as a list of all your property, debts, creditors and expenses. You use this information to file bankruptcy documents with the court such as your petition, schedules and statement of financial affairs.

If the trustee determines that there are assets to be administered, creditors will be instructed to file a proof of claim evidencing their debts. At this point, assets will be turned over to the trustee who will begin to sell them to pay off your creditors.

The process is a long and confusing one. If your business is in serious debt and needs help, it is best to contact an experienced, qualified attorney to help explain all your options.