Chapter 7 Bankruptcy for LLCs

Whenever a corporation or an LLC is struggling to keep operating, they usually file a Chapter 11 bankruptcy. This type of bankruptcy allows the business to restructure its debt payments obligation in a way that benefits both the business and its creditors. But it’s not unusual for an LLC to file a Chapter 7 bankruptcy which can eliminate its debts but the business or company has to close after filing.

Filing for a Chapter 7 bankruptcy is riskier compared to just winding down the LLC. Some business owners aware of the risk choose to file their own Chapter 7, 11, or 13 bankruptcy after their companies close.

Chapter 7 Business Bankruptcy

chapter 7 bankrutpcy for llcYou need to understand the difference between filing for a business Chapter 7 bankruptcy and a personal Chapter 7 bankruptcy.  Research what happens in a Chapter 7 business bankruptcy and how it can benefit your LLC or corporation.

You also need to understand the risks of filing a business Chapter 7 bankruptcy.

Chapter 7 Bankruptcy for Corporations vs Personal

Either an individual or a business should consider filing for Chapter 7 bankruptcy if they are no longer able to repay their debts.

Usually, it’s the type of debt that determines whether it’s a business or personal Chapter 7 bankruptcy.  That means that if a person files for bankruptcy for debts mostly connected with activities that involve generating profits, then it’s probably a business Chapter 7 Bankruptcy.

But if the debts are related to running a household or are consumer debts, then it’s more likely that the individual is filing a personal Chapter 7 bankruptcy.

Personal vs Business Chapter 7

A business doesn’t have to go through a means test to be eligible for a business filing a Chapter 7 bankruptcy, but an individual has to pass a means test to be eligible. A means test compares your income to the state’s median income. For example, anyone with an income that is equal to or less than the state’s median income is eligible to file a Chapter 7 bankruptcy.

But you may still be able to file a Chapter 7 bankruptcy without passing a means test if you closed your business and are now working in a high-paying job. This is possible if most of your debts are related to the business you closed.

Business Bankruptcy Lawyer Near Me

When an LLC or corporation files for Chapter 7 bankruptcy the business closes.  The trustee appointed by the bankruptcy court will look at the bankruptcy papers, review the claims of the creditors, sell the business assets, and then use the proceeds for the sale of assets to pay the creditors. This process sounds simple but you need to keep in mind that it’s an expensive exercise.

Unlike for an individual, filing a Chapter 7 business bankruptcy does not result in the debts of the company getting erased. There is no need for this because the company no longer exists because it was closed.

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