An entrepreneur needs to be free to move to the next project with a minimum of interference. A Chapter 7 bankruptcy can be the best way to accomplish this goal. It allows business leaders to terminate a business and move forward because an independent trustee does the work of liquidation and is paid from the proceeds.
Corporations, limited liability companies (LLCs) and many other business entities are automatically eligible for Chapter 7. Also, individuals with primarily business debts are automatically eligible. However, an individual with mostly consumer debt must pass a means test to qualify. If the income is in excess of certain thresholds, the debtor is not eligible for Chapter 7.
A Chapter 7 case is a liquidation in which an independent trustee takes control of the assets of the debtor, liquidates the assets, reviews claims and makes distributions to creditors. Usually, a company must cease operations upon filing a Chapter 7 case, but an individual may continue in business under certain circumstances. The Chapter 7 trustee can apply to the court for permission to operate the business for a limited time, but this is rare.
A disadvantage of Chapter 7 is that the process is public and involves scrutiny by the trustee. If privacy is a paramount concern, consider out-of-court solutions such as winding up and dissolving or an assignment for the benefit of creditors (ABC). On the other hand, a chief advantage of Chapter 7 is that it carries a high degree of certainty and finality.
At Macdonald Fernandez LLP, we have successfully handled Chapter 7 cases for businesses with annual sales as high as $20 million and as small as individual home-office businesses. In one example, we represented a restaurant design and equipment supply company owned by a family who had guaranteed the bank’s secured line of credit of approximately $500,000. We strategically managed the case and worked with the trustee to structure the liquidation to fetch top dollar, resulting in payment of the guaranteed debt in full.