Should a Buisness file Bankruptcy?
Deciding to close a business or file bankruptcy is a very difficult decision. Many business owners have invested substantial time, money and emotions into a business. If the business is operated as corporation, Limited Liability Company or a partnership, the owners should consider the following.
If there is no viable future for a business, Chapter 7 Bankruptcy liquidation may be the best choice for a business owner. A bankruptcy petition is prepared and filed and a Bankruptcy Trustee is appointed by the Bankruptcy Court. The Bankruptcy Trustee will assume control of the business and provide for an orderly windup of the business operations. The Bankruptcy Trustee will liquidate any assets and settle all debts owed by the corporation, LLC or partnership.
If a Corporation has no Assets for the Bankruptcy Trustee to liquidate, then the business may not want to file a Chapter 7 bankruptcy. The business may elect to dissolve the corporation, LLC or partnership under state law. If so, legal counsel will be essential to guide the corporation or partnership and assure that that business debts do not end as personal debts of the owners.
If a corporation, LLC or partnership has assets and the ability to continue to operate but is struggling to meet it's currently obligations, then it may consider filing a Chapter 11 bankruptcy and re-organize. A business owned as a sole proprietorship should consider reorganizing under Chapter 13 or Chapter 11 to continue its operations.
Deciding which strategy is better for all parties is best decided after consulting with an experienced Sacramento and Solano business bankruptcy attorney.
Operating a Business after Filing Bankruptcy
Can a Debtor (person or business that files for bankruptcy protection) continue to operate a business after filing for bankruptcy?
- Chapter 7 of the US bankruptcy code is a liquidation bankruptcy; i.e. the purpose of filing under Chapter 7 is to liquidate all non-exempt assets of the debtor, discharge most debts and get a fresh start.
- Chapter 11 or Chapter 13 bankruptcy is generally used to the protection granted to Debtors to by the bankruptcy court to hold creditors at bay until a chapter 13 or chapter 11 bankruptcy plan to reorganize the business can be approved by the bankruptcy courts. ??
Upon the Filing of a Chapter 7 bankruptcy, the court will appoint a Chapter 7 trustee who steps into the shoes of the debtor and literally owns the assets of the Chapter 7 business unless those assets can be protected and exempted from the trustee's reach. This transfer of power and authority is instantaneous with the business filing for bankruptcy protection
Many Chapter 7 business clients are not advised properly before their Chapter 7 Bankruptcy case has been filed. The absence of sound advice may result in personal liability for business debts or that the business assets belong to the Chapter 7 Trustee, the minute their case is filed with the Bankruptcy courts subject to their exemptions to protect their assets from the Chapter 7 Bankruptcy Trustee.
Chapter 7 business Debtors who operate as Sole proprietorships can use legal exemptions under the state law and bankruptcy laws to protect some or all of their business assets. An experienced Sacramento business bankruptcy attorney can help you plan and protect your business assets so that you can continue to own and use those assets necessary to operate your business and survive.
Chapter 7 Bankruptcy Debtors that are corporations, partnerships and limited liability companies cannot exempt assets in the Chapter 7 bankruptcy--the business is liquidating and getting a fresh start. These business entities are not entitled to claim exemptions like sole proprietorships. Therefore, the Chapter 7 Trustee will liquidate all assets of a corporation, partnership or limited liability company that files for Chapter 7 Bankruptcy. A corporation, partnership or limited liability Company that needs to file bankruptcy must consult with the experience Sacramento bankruptcy lawyer.
Chapter 11 and Chapter 13 bankruptcy allow business owners to continue to operate their business without much interference with the bankruptcy trustee. Many business owners can still get a tremendous amount of relief under Chapter 11 and Chapter 13. Most are required to pay very little debt back and still operate their businesses without being shut down. Also, business owners get to keep their assets which may be necessary to operate the business and keep the doors open. The Sacramento attorneys at Brooks & Carpenter can help you decide which bankruptcy is the best choice for your business and future.
With proper planning, the trustee may realize the business assets have no value in the marketplace and abandon the assets back to the corporation, partnership or Limited Liability Company. This means that the business may get to keep the assets for the future.
What happens to the Assets of a Sole Proprietorships, Corporation or Partnership?
All assets of a business must be listed in the Debtor's bankruptcy petition. The bankruptcy petition is the document that is prepared and filed with the bankruptcy court. It lists all of the assets and all liabilities of the business.
If the debtor is a corporation, partnership or limited liability Company, then all of the assets of the entity are included in the chapter 7 bankruptcy.
If the debtor is a individual, then all of his or her interests in the business are considered an asset of the bankruptcy estate, whether the interest in the business is in the form of stocks, partnership interests,, membership interests in an LLC or an interest as a sole proprietorships.
The Trustee has the control over all assets of the business until (s)he determines that the assets are either exempt in the case of a sole proprietorship or of no value to the bankruptcy estate and abandons the assets back to the debtor in the case of a corporation, partnership or limited liability company,. But, until the bankruptcy trustee deems that he has no interest in the assets, those assets belong to bankruptcy estate.
Operating a business during a bankruptcy can prove to be problematic. Sole proprietorships do not have the legal authority to operate their businesses after a Chapter 7 bankruptcy has been filed. Therefore, any business that can not risk any inference in the operation of its business - even for (1) day may consider filing a Chapter 13 or Chapter 11 in lieu of filing Chapter 7 bankruptcy.
Can a Debtor protect the value of his or her business in bankruptcy (legal term is "exempting assets" of the business?)
"Exemptions" are statutory and common laws that all persons or businesses, that operate as sole proprietorships and file for filing bankruptcy are entitled to protect certain property from the bankruptcy trustee.
Exemptions allow bankruptcy debtors to protect the value of certain property owned by the debtor or sole proprietor filing bankruptcy.
Assets of the Business
Assets that many business owners have are tools of the trade, inventory, account receivable, client and customer lists, business name, goodwill and other intangibles - such as patents, copy rights, trademarks, internet domain names, local and toll-free telephone numbers, post office boxes; security deposits given to landlords, worker's compensation insurance, and utilities., pre-paid advertising, insurance claims, rights and lawsuits against third parties, tax refunds, leasehold interests, franchise rights.
Sole Proprietorships must subject all of their assets to the bankruptcy court. However, most businesses are able to keep and protect their assets with proper planning.
Unfortunately, Corporations, Partnerships and Limited Liability Companies are not entitled to protect assets with exemptions. Therefore, unless the bankruptcy trustee determines that the assets are not valuable to the bankruptcy estates and abandons the assets back the entity, the assets will continue to belong to the bankruptcy estate.
Discharge of Debts
A "discharge" is a Court order that says you do not have to pay most or all of your debts. Some debts cannot be discharged in bankruptcy.
Corporations, Partnerships and Limited Liability Companies are not entitled to a discharge. Therefore, a Corporation, Partnership or Limited Liability Company may consider dissolving the entity under California law after consulting with experienced legal counsel.
Can a Business Start a New Business Entity?
Business owners that file bankruptcy can start a new business. However, business owners must be careful when establishing a new business as well as and transferring assets to a new entity. If the new business is viewed as a continuation of the current business--problems can arise. Creditors and the Bankruptcy Trustee may argue that the transfer of assets was fraudulent under state and federal law and file a lawsuit against the owners outside of the bankruptcy.
Control your business for the future---consult with an experienced bankruptcy and business attorney prior to considering forming a new business. Sacramento and Solano county bankruptcy lawyers can help you.