Filing A Chapter 7 Bankruptcy For Businesses

When considering whether to file a Bankruptcy for your business, it is important to understand the distinction between Chapter 11 bankruptcy and Chapter 7. Chapter 11 involves the reorganization of the company's debt and, as such, it is very arduous and expensive. This is why Chapter 11 is typically associated with larger organizations. The main advantage of a Chapter 11 is that the company will survive the process and continue its existence.

In Chapter 7 business bankruptcy, the business ceases to exist; it liquidates. A Chapter 7 bankruptcy is typically recommended in two instances. The first is where the assets, when liquidated, are not sufficient to cover the debt, a condition known as insolvency. The second instance is when there is ongoing litigation and the business can no longer sustain the expense of that litigation.

In a Chapter 7, the business assets are turned over to the court-appointed trustee, who will determine which course of action to follow. The possibilities include:

  1. Sell the business assets and pay the creditors their proportionate shares of the proceeds
  2. Abandonment, which happens when the trustee determines there is not sufficient asset liquidation value to cover a meaningful percentage of the debts
  3. Operate the business for a short period of time

    • This can occur when the liquidation value of the business is enhanced by completing an ongoing task or project. In this instance, the trustee may appoint a receiver, who may step in and finish a project that is underway. After completion of the task or project, the trustee can then move forward with the liquidation and distribute the proceeds amongst the creditors.

Whichever route the trustee chooses to follow, the cooperation and assistance by the original business owner is often greatly appreciated by the trustee, especially when they have to deal with some common issues.

The main issue which often arises is the extent to which the principal(s) was compensated in the months and years leading up to the closure of the business. While it is generally acceptable for the principal(s) who is operating the business to be compensated for the fair market value of their services, excessive distributions to the principal(s) of the liquidating company can potentially be problematic. This is where the Fort Lauderdale bankruptcy attorneys of the DiTocco Law Group, PLLC, can provide assistance and advice.

Another issue often raised by potential Chapter 7 principal(s) is whether they can continue to earn a living. The creation of a new business, which in many cases emulates the business model of the liquidating business, could be considered a continuation of the old business. On the one hand is the public policy that everyone is entitled to earn a living; on the other hand is the practical consideration that a business that closes under one name shouldn't be allowed to open up across the street under a different name and frustrate the rights of the trustee and the creditors of the original business. This is a very fact-specific area of Chapter 7 that involves many nuances, which can be discussed with your Fort Lauderdale bankruptcy lawyer at the DiTocco Law Group, PLLC.

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