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Small business Chapter 7 bankruptcy includes assets liquidation

On Behalf of | Oct 6, 2014 | Firm News

A small business in Pennsylvania can file a Chapter 7 bankruptcy if it intends to cease doing business and owes unmanageable debt. If the company closes its doors, a Chapter 7 Trustee will take over any unencumbered assets and will likely hold a public auction to sell the property. In the meantime, as soon as the case is filed in the federal bankruptcy court, an automatic stay is issued to protect the business from further collection activities as it winds down its affairs.

The legal structure and other particular financial circumstances of the business may have something to do with the remedy to choose. The best way to become informed on your options is to consult with a bankruptcy attorney. In very general terms, if the business is some form of business corporation or limited liability entity, the individual owners will not be pursued for the unsecured debts when the business files a bankruptcy.

Thus, a small corporation would cease operating, turn over its assets to the trustee, and close out its tax returns. The corporation is usually dissolved by filing papers with the state and advertising the dissolution. If there are assets that are encumbered, i.e., they have liens on them such as a U.C.C. financing statement, the lender will be able to repossess that equipment or other property.

The unencumbered assets will be sold, as stated above, and the proceeds proportionately distributed to the unsecured creditors. Salaried employees and a few other statutory categories are made priority creditors who get paid first, up to a certain amount. The owners of the corporation, or the partners of a partnership, will not generally be liable to pay the bills of unsecured creditors.

In some cases, depending on the circumstances of the company, it may be appropriate for the principal owners to simply close down operations, while each one files his or her own personal bankruptcy without filing a business liquidation. Again, the remedies and options are fact-specific, and can have several different permeations and exceptions, both under Pennsylvania law and the law of other jurisdictions. The complexity of the issues makes them best evaluated and resolved within the confidential confines of an attorney-client consultation.

Source: The Washington Post, “@Work Advice: Closing a chapter (7), with guest advice from Nora Raum“, Karla L. Miller, Oct. 2, 2014