Chapter 7 Bankruptcy – Liquidation
If the business owner hopes to put the bankrupt business behind them and make a fresh start, Chapter 7 is probably the best option. Under Chapter 7, the court appoints a trustee who gathers and sells all of the debtor’s nonexempt assets and uses the proceeds to pay the debtor’s creditors. Most remaining debts are then discharged and the business dissolved. Chapter 7 bankruptcies are commonly referred to as liquidations.
Business owners should know that all of the businesses assets will be sold – including intellectual property and client lists. If the debtor hopes to hold on to some of the business assets, they should file under another chapter or be prepared to buy the assets when the trustee sells them.
If the business owner is an individual, the court will closely scrutinize the debt to make sure the filing is not an abuse of Chapter 7. An individual debtor will have to show the debts are primarily business related rather than consumer debt, and will have to undergo a means test. If the court determines the debts are primarily consumer debts, or the individual fails the means test, the court can convert the case to a Chapter 13 filing or even dismiss the case.