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For Corporations, Weigh Chapter 7 Bankruptcy Against Other Options When Winding Up Affairs

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More than half of all businesses formed today will be gone in five years. Statistics like that notwithstanding, Chapter 7 bankruptcy isn’t usually the best route to take for the corporation shareholders.

According to Statistic Brain, chances of small business success are slim over the long haul. From incompetence to disasters, a litany of mistakes can shutter your operations in short order.

Many small business owners turn to the corporate form as a way of protecting their assets. In so doing, they become shareholders of a corporation that owns the business assets.

But if the venture fails, the same protections from creditors that you’d get in a Chapter 7 bankruptcy don’t quite pan out for the corporation.

How Chapter 7 Bankruptcy Works For Corporations

Chapter 7 bankruptcy is used for liquidation purposes. A trustee is appointed to sell assets and distribute the funds to creditors.

For individuals and married couples, the end result is a discharge of personal liability for repayment of many types of debts.

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Corporations, however, cannot be given a discharge. Though assets are sold, the end result of the Chapter 7 bankruptcy is … simply the closing of the case.

That’s because once the business is liquidated and everything sold, there’s nothing left. There is no business, no assets, no inventory. Though there’s no discharge, there’s no need for one.

Using Chapter 7 Bankruptcy To Shut The Corporation

Though a discharge isn’t available to the corporate Chapter 7 debtor, that doesn’t mean it’s of no value. To the contrary, a Chapter 7 filing may be exactly what you need to wind up affairs.

Filing for Chapter 7 bankruptcy may be an orderly way to sell off assets and pay creditors depending on the corporate situation. For example, if all creditors are unsecured then it’s a handy tool for organizing and prioritizing repayment and liquidation of assets.

Chapter 7 may also be a good way to help people who have cosigned and guaranteed loan repayments on behalf of the corporation. Liquidation of corporate assets will reduce the amount the individuals will need to pay once the dust settles.

First, Consider State Law Options

Sometimes bankruptcy’s the wrong choice for a corporation looking to wind up affairs. You take the risk that he trustee appointed to oversee the sale of the assets doesn’t have the familiarity with your industry necessary to fetch the best price. That, in turn, may lead to guarantors and cosigners being left with a greater burden after it’s all over.

Consider, then, state law options.

In many states, California included, a corporation can do what’s called an assignment for the benefit of creditors. Under state law, there’s a procedure for the corporation to take all assets and hand them over to a receiver for sale and distribution to creditors. The process functions similarly to a Chapter 7 bankruptcy for the corporation, but without the filing.

If a corporation’s debts are all secured by equipment or receivables, it could simply give up the security to the creditor and be done with it. Again, no bankruptcy involved.

Once that’s done, just close the corporation through dissolution under state corporation law.

Choose Based On Your Needs

Your corporation can choose to go through a Chapter 7 bankruptcy to wind up affairs, or opt for a remedy under state law.

No solution is perfect, nor does one size fit all. But if you analyze your needs along with the pros and cons of each choice, you’ll find one to suit your goals.

By |January 9th, 2014|

About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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