Generally speaking, if a company is going through a bankruptcy or a liquidation, it means that the organization is in financial peril. In some cases, these moves are made in an attempt to pay creditors before going out of business. However, it is important to note that there is a slight difference between a liquidation and a formal bankruptcy.
Liquidations can occur without filing for bankruptcy
A company is within its rights to sell inventory, real estate or other assets that it owns without having to file for Chapter 7 bankruptcy. Furthermore, a business is not obligated to cease operations after selling assets independent of a bankruptcy proceeding.
A liquidation will occur if a company files for Chapter 7 protection
If a company files for Chapter 7 protection from creditors, it will be required to liquidate its nonexempt assets. The money that is raised will go toward the organization’s unpaid debts, and if there are any unpaid balances remaining after nonexempt assets are sold, those balances will likely be discharged by the court. At that point, the entity that filed for a Chapter 7 business bankruptcy will be required to shut down.
What happens if you secure business loans with private collateral?
Say that you obtained a personal loan to provide working capital for your business. If you filed for a business bankruptcy after doing so, your personal assets might be at risk depending on how your company was structured. For instance, you could lose any equity that you have in your home or car in excess of the state or federal exemption. Property such as money in a retirement account or clothing will likely be exempt from being liquidated in a Chapter 7 case.
Filing for a business bankruptcy might allow you to walk away from a failing company and start the process of rebuilding your finances. An attorney may be able to explain the process of a Chapter 7 case and the potential benefits of seeking a liquidation bankruptcy.