Liquidation Under Chapter 7

In a Chapter 7 bankruptcy, the debtor’s assets are liquidated and the proceeds are distributed to creditors. Partnerships, sole proprietorships and corporations, in addition to individuals, are eligible to file under Chapter 7. However, unlike individuals, these business entities are not eligible to receive a discharge. 11 U.S.C. § 727(a)(1). Chapter 7 business liquidations are conducted in significantly the same manner as Chapter 7 consumer bankruptcies — many of the business’s assets are sold and the proceeds are divided among the company’s creditors. Partnerships or corporations that wish to keep doing business may decide that Chapter 7 is not the best option because after liquidation and distribution, the business ceases to exist. If you run a business that is facing financial difficulty and are considering bankruptcy, talk to an attorney about your options.

Chapter 7 Procedure

If a business has such a large load of debt that there is no way it can remain in business, liquidation under Chapter 7 may be the only option. A Chapter 7 case begins with the debtor’s filing of the petition with the bankruptcy court, which triggers the automatic stay (stop) of all collection efforts by most creditors. Filing a petition does not stay certain types of actions, and the stay may only be in place for a limited period of time. All operations of the business cease and the bankruptcy court appoints a trustee, who will be responsible for the sale of the company assets and disbursement to creditors.

Along with the petition, the debtor must file a schedule of assets and liabilities; a schedule of current income and expenditures; a statement of financial affairs; and a schedule of executory contracts and unexpired leases. Fed. R. Bankr. P. 1007.

The trustee oversees the Chapter 7 case and liquidates the debtor’s assets in order to pay off debts. The trustee will also hold a meeting of creditors between 20 and 40 days after the debtor files the petition. The debtor must attend the meeting of creditors and answer questions, under oath, about property and financial matters. 11 U.S.C. § 343.

In some cases, the debtor’s assets are exempt or already subject to valid liens, so there will be no assets to liquidate. The trustee can try to recover money for the estate under the trustee’s “avoiding powers.” These powers include the power to set aside preferential transfers to creditors within 90 days of filing; undo security interests and pre-petition transfers that were not properly perfected; and pursue fraudulent conveyance and bulk transfer claims under state law. After gathering all the available assets, the trustee will sell them and collect the proceeds in a fund from which the debts are paid to the extent possible. Under § 726 of the Bankruptcy Code, property is distributed according to six classes of claims; each class must be paid in full before creditors in the next lower class are paid anything.

Speak to a Bankruptcy Lawyer

If the business’ debts are insurmountable and the owners do not wish to continue business operations, Chapter 7 may be a good fit. A bankruptcy attorney can explain how Chapter 7 works and what the consequences of Chapter 7 are for your business.

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

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