Chapter 7 Bankruptcy FAQs For Business Liquidation

When can a Company file for a Chapter7 bankruptcy?

Some companies are so far in debt or have other problems so serious that they can’t continue their business operations. They are likely to “liquidate” and file under Chapter 7.

What are the alternatives to filing for a Chapter 7 bankruptcy?

There is no universal answer to whether a failed business should file a Chapter 7 bankruptcy or liquidate on its own under state law. Each case is unique and only a qualified and experienced bankruptcy attorney can help a company determine whether a Chapter 7 bankruptcy is required. The factors that are usually considered are: the value and nature of the assets of the business; the attitudes of creditors; the availability of management to oversee the process and the likelihood of officers and directors to become personally liable for certain debts.
When is it feasible to file for a business Chapter 7 bankruptcy?

There are a number of factors that can make a Chapter 7 bankruptcy more advantageous than a simple business liquidation. For example:
• When a business needs a bankruptcy trustee to become responsible for liquidating assets, returning equipment, and dealing with creditors, thereby freeing management to turn to other endeavors;
• When a business needs to sell leases despite anti-assignment provisions and to avoid levies and writs of attachment, recovering value for creditors, which is otherwise impossible outside of the bankruptcy proceedings;

• When a business wants to reduce the instance of creditors naming management as well as the business in collection actions;

• When a business needs an automatic stay to prevent aggressive creditors from diverting cash that could be used to pay taxes, employees, and guaranteed debts or recovering property needed for wind up.

How does Chapter 7 Bankruptcy work for business?

Under Chapter 7, the company stops all operations and goes completely out of business. A Trustee is appointed to “liquidate” (sell) the company assets and the money is used to pay off the debt, which may include debts to creditors and investors. The investors who take the least risk are paid in first. For example, secured creditors take less risk because the credit that they extend is usually backed by collateral, such as mortgage or other assets of the company. They know they will get paid first if the company declares bankruptcy.

What about with stockholders?

Stockholders own the company, and take greater risk. They could make more money if the company does well, but they could lose money if the company does poorly. Stockholders do not have to be notified of the Chapter 7 case because they generally don’t receive anything in return for their investment. But, in the unlikely event that creditors are paid in full, stockholders will be notified and given an opportunity to file claims.

What about bondholders?

Bondholders have a greater potential for recovering their losses than stockholders, because bonds represent the debt of the company and the company has agreed to pay bondholders interest and to return their principal.

Does my stock or Bond Have any Value?

Usually, the stock of a Chapter 7 company is worthless and you have lost the money you invested. If you hold a bond, you might only receive a fraction of its face value. It will depend on the amount of assets available for distribution and where your debt ranks in the priority list on the first page. If your bond is secured by collateral, your payment will depend in large part on the value of the collateral.

What about the rights of creditors?

Fully secured creditors, such as collateralized bondholders or mortgage lenders, have a legally enforceable right to the collateral securing their loans or to the equivalent value, a right which can not be defeated by bankruptcy. A creditor is fully secured if the value of the collateral for its loan to the debtor equals or exceeds the amount of the debt. For this reason, however, fully secured creditors are not entitled to participate in any distribution of liquidated assets that the bankruptcy trustee might make. Unsecured creditors, on the other hand, might be entitled to the portion of the liquidated assets depending on their availability.

Does a Company get a discharge of its debts in a Chapter 7 bankruptcy?

In a Chapter 7 case, a corporation or partnership does not receive a bankruptcy discharge, instead, the entity is dissolved. Only an individual can receive a Chapter 7 discharge (see 11 U.S.C. § 727 (a) 1). Once the trustee fully administers all assets of the corporate or partnership debtor, the case is closed. The debts of the corporation or partnership theoretically continue to exist until applicable statutory periods of limitations expire.

Are the Company’s retirement plans protected from bankruptcy?

Retirement plans vary dramatically from company to company. Some companies have “unfunded plans”, which are a general obligation of the business similar to other company obligations. Properly established and funded plans under ERISA are generally protected and are not included as a property of the bankruptcy estate of the Company. In ERISA- qualified plans, the law requires an employer to keep retirement money in a trust separate from the employer’s own funds. However, if your employer’s business is having problems, it may be worth your effort to ask questions about the security of your retirement money.

Can a Company that files a Chapter 7 bankruptcy start a new business afterwards?

Yes, but is generally inadvisable since a company does not receive a bankruptcy discharge. It is usually better to start over with a new company, sometimes after purchasing assets through a bankruptcy sale from the bankruptcy corporation. On rare occasions, a company may purchase the corporate “shell” of a company eligible to sell stock on a listed exchange to avoid going through the registration process. In any event, one would want to change the corporate name to avoid the stigma of the previous business failure.

What will happen to my company if I file a personal bankruptcy?

Since a corporation is a legal entity different and distinct from its shareholders, the bankruptcy of a shareholder does not affect the corporation. The bankrupt shareholder’s shares in the corporation, however, are an asset of his bankruptcy estate and may be sold in his individual bankruptcy case.