If you’re dealing with business debt, you may be considering bankruptcy as a way to alleviate the financial stress and come to a new resolution for your company. One of your options is a Chapter 7 bankruptcy. Before you make a decision, it’s important to fully understand the implications, ramifications, and obligations associated with the types of bankruptcy and to understand what’s the best option for you.
Chapter 7 bankruptcy is a way for a struggling company to wind down the business in an orderly way. Many companies facing bankruptcy are unable to meet payroll or pay their creditors. A Chapter 7 bankruptcy releases the business from debts it cannot meet.
When a company files for a Chapter 7 bankruptcy, it should be done with a lawyer. Working with counsel is the right way to handle shutting down a business and ensures a legal, orderly wind down. Closing a company outside bankruptcy can lead to problems down the road because if collectors don’t know the business has closed, they could be chasing you for money for years to come.
Other benefits to filing Chapter 7 include giving the business one way to inform all creditors at once that the company has ceased operations, which can bring an end to aggressive collection attempts.
Other Options
Chapter 7 fits businesses that won’t keep operating, but even then, there are other options to consider before resorting to filing for bankruptcy. New Jersey’s assignment for the benefit of creditors, which is handled in state court, allows a company to sell its assets and use the proceeds to pay its creditors.
There are other bankruptcy options for businesses to consider before filing a Chapter 7, including Chapter 11 or Subchapter V. You, as an individual, may also file a personal Chapter 7, Chapter 11 or Chapter 13.
If it’s time to end the company, if the company fits the Chapter 7 criteria, and if it is okay with working within the federal bankruptcy code, then a Chapter 7 can be the right move. What that means is the company is closing its doors for good. As part of a chapter 7, you need to be ready for an investigation and to hand over information.
By comparison, Chapter 11 bankruptcy usually costs more than a chapter 7 bankruptcy, and if a business has no assets or doesn’t have revenue to pay creditors now or pay for reorganization, then a Chapter 11 might be out of reach.
The downsides to a Chapter 7 include that the business shuts down the moment you file. You can’t tell the court you’re closing the business in a year. Also, at least one owner or operator has to stay fully involved in the case.
A chapter 7 is likely a bad fit if the trustee has grounds to sue business owners over taking money from the company during its operation.
How Long It Goes
The length of time a case lasts depends on the facts and circumstances. Once you file, a trustee gets named to the case right away, and when the case starts someone representing the company, like a former owner, gets asked to attend a creditors’ meeting that happens roughly 30 to 45 days later.
After the meeting, a trustee looks at whether the company has assets to sell to try to raise money for creditors, and that process can take five to six months or a few years. The trustee runs the case, and it may be that the trustee needs nothing from you. Make sure you’re comfortable with your role being small before you file.
Payments to Business Owners
One common concern: payments to business owners before the bankruptcy was filed. Paying business owners or people close to the business ahead of other creditors can trigger repayment, called a clawback, under what are known as preference and fraudulent transfer laws.
Another item to bear in mind is that owners might have signed personal guarantees that turn them on the hook for company debt, along with laws that make business owners liable for certain unpaid debts. A chapter 7 typically won’t pay any of this, so it is a crucial issue to weigh before filing.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
