Business Bankruptcy: Personal Assets in a Chapter 7 Liquidation

Business Bankruptcy - Personal Assets in a Chapter 7 Liquidation

If your business has significant debt, bankruptcy may be the solution. Businesses can file for bankruptcy protection under both Chapter 7 and Chapter 11 of the Bankruptcy Code. Both provide effective but very different protections from creditors. In some cases, business bankruptcy can involve the personal assets in a Chapter 7 liquidation.

You may want to renegotiate the debts and continue business operations. If that’s the case, Chapter 11 bankruptcy is a better choice than Chapter 7. Chapter 11 reorganization allows you to renegotiate debts and contracts while continuing to operate. Going concerns with one-off debt problems or individual problem creditors (like landlords) should consider Chapter 11. Many businesses, from time to time, experience temporary cash-flow issues and survive them intact.

On the other hand, Chapter 7 bankruptcy, or “liquidation” bankruptcy works well for businesses that want to discontinue operations once the bankruptcy is finalized. For single-member LLCs, partnerships, or family-owned businesses, Chapter 7 can resolve debt problems during and after the closure of the business. But the cessation of business operations sometimes also triggers liability for owners. You should carefully think through the possible effects on your personal assets if you are considering the Chapter 7 liquidation of a business.

Personal Assets in a Chapter 7 Liquidation

Business Bankruptcy and Chapter 7 Liquidation

Chapter 7 bankruptcy, or “liquidation,” entails the sale of the assets of the business to satisfy unsecured creditors. If the business has no assets, then the trustee will label the business “no distribution.” In those cases, the bankruptcy ends very quickly. If the business has assets, then the bankruptcy trustee will assess and sell them.

Most businesses entering Chapter 7 do not have assets worth distributing. In most cases, at the end of the bankruptcy, the remaining balance of eligible debts of the business are no longer collectible. With no operations and no assets to pursue, the creditors of the business cease collection efforts. But in some instances, personal assets of the business owners may be at stake.

Personal Assets in a Chapter 7 Liquidation

A Chapter 7 business bankruptcy may impact your personal finances under certain circumstances. Both corporate structure and the nature of the debt influence how a business bankruptcy affects your personal assets.

Corporate structure. Incorporated businesses are entirely separate legal “persons” in the eyes of the law. Otherwise, the business bankruptcy and subsequent liquidation will not impact your personal finances in any way. But if your business is a sole proprietorship or a partnership, then your business is not a separate legal entity. You and your business may be considered to be one and the same “person.” As a result, a business bankruptcy is just like a personal bankruptcy. For example, if you file for Chapter 7 and you are a sole proprietor, the bankruptcy will show up on your own credit report. And your personal debts can also be included in the bankruptcy filing. In addition, any unexempt assets become part of the bankruptcy estate and can be sold to repay creditors.

Personal guarantee. Business bankruptcy most often affects personal assets where a business owner personally guarantees a business debt. In that case, the creditor can pursue separately and simultaenously both the business and the owner. A Chapter 7 bankruptcy for the business does not affect the creditor’s ability to pursue the business owner on the debt. At the conclusion of the Chapter 7, the owner of the business may still be personally liable for guaranteed debts.

Fraud or gross mismanagement. In less common cases, a Chapter 7 business bankruptcy may imperil the personal assets of the business owner accused of wrongdoing of some kind. Embezzlement, misuse of corporate funds, failure to pay employment taxes, and other negligent or fraudulent acts may give rise to business owner liability despite the business’s Chapter 7 bankruptcy.

Contact a Business Bankruptcy Attorney

To understand how bankruptcy for your business will affect your own money and assets, contact an experienced bankruptcy attorney. Serving Washington, D.C., Maryland, and Virginia, Lee Legal can help you to explore debt relief solutions for your business. When you see trouble on the horizon, the sooner you act, generally speaking, the more options you have.

In some cases, a business bankruptcy will affect not only the debts of the business, but also your personal assets and debts. Yet there are steps that you can take to limit those effects. Talk it over with an experienced business bankruptcy lawyer to ensure you make fully informed choices. You and your business don’t have to face your debts alone.

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About Brian V. Lee 566 Articles
Brian V. Lee provides bankruptcy, foreclosure defense, business turnaround, and litigation services to clients in the District of Columbia, Virginia, and Maryland. Brian was the Washington, D.C. state chair of the National Association of Consumer Bankruptcy Attorneys from 2016 to 2018.