Whether to file Chapter 7 bankruptcy is an enormous decision for a small business. For the most part, there are three key factors to consider:
- The kind of business;
- Whether you believe your business is still a viable operation; and
- The type of business structure you've adopted.
Chapter 7 in a Nutshell
Chapter 7 is "liquidation" bankruptcy. This means that the debtor's assets are "liquidated," or collected and sold to raise money. These proceeds--plus any liquid assets, such as cash in the bank--are then distributed to creditors. After creditors are paid as much as they can be from the debtor's assets, any remaining debts are discharged, or eliminated.
It Can be Hard to Run a Business After Liquidating It
Nothing in the law says that you can't stay in business after Chapter 7...however, there may effectively be nothing left. A business's assets, potentially subject to liquidation, include real estate, vehicles, warehouse or office equipment, computers, accounts receivable, even intellectual property. As a practical matter, not all of these assets may be liquidated, since some may have no effective value or no market; however, many "hard" assets, like property and equipment, are fairly easy to liquidate. It is therefore likely that a large portion of a business's assets may be liquidated, leaving an asset-less shell.
What Kind of Business is It?
A personal or professional services business--e.g. dog walking, architecture, accounting, freelance writing, PR or advertising--can probably run fairly well even after hard assets are liquidated. That's because the main "asset" of the business is owner or employee effort, skill, contacts, and training--everything else is secondary or replaceable.
However, a capital-intensive business is another story. Try running a restaurant or catering business without industrial stoves and cooktops; try being a pool-installation company without backhoes, trucks, or cement mixers.
There are certain kinds of business that can survive liquidation; others cannot.
Do You Think Your Business is Still a Viable Operation?
If you want to remain in business, and think that you can--once you've eliminated your overhang of excessive debt through bankruptcy, that is--then if you are in a business reliant on property, equipment, or inventory, Chapter 7 is probably not for you. Instead, in those situations, some other form of bankruptcy more conducive to continuing operations, such as Chapter 11, is probably a better bet.
Type of Business Structure
Remember, a partnership or a sole proprietorship is not a separate legal entity. For those businesses, the business and owner are one. Therefore, if you're contemplating Chapter 7 for your sole proprietorship, what you really have to ask is whether you want to personally declare Chapter 7--because that's what you'd have to do. Corporations and LLCs, on the other hand, since they are their own independent entities, give you far more leeway in filing bankruptcy on your business, not yourself.
How an Attorney Can Help
Deciding which type of bankruptcy to file is complex. An attorney can guide you through all the ins and outs of the law, to make sure you make the correct choice for your business and yourself.
