What Is The Process For A Chapter 7 Business Bankruptcy?

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The first thing I do in a business Chapter 7 bankruptcy is meet with the owner of the business, the board of directors, and the main stockholders, and discuss strategy. I ask:

• If the business could somehow restructure these debts, would the business succeed?
• Does the business just need additional time to pay off debts?
• Would a restructuring of debt be helpful?

If the answers to those questions is yes, then Chapter 11 bankruptcy may be the best option. If the answers are no, then the business is over, and Chapter 7 bankruptcy is probably the best option.

In order to proceed with the bankruptcy, the board of directors must prepare and sign a corporate resolution authorizing the filing of the bankruptcy case and the hiring of general bankruptcy counsel (i.e., my firm). The board must also authorize one of its members to serve as “the person most knowledgeable.” (The “PMK.”) The PMK will attend all hearings on behalf of the board.

Next, I prepare the bankruptcy petition and the ancillary schedules and other documents using the information and copious required documentation provided by the board. The relevant documents include tax returns for the past several years, a list of assets (including inventory), a list of corporate debts, bank statements, unexpired leases, and executory contracts. Then I file the documents.

Once I know who the Chapter 7 Trustee is, I send all of the documents or at least copies of all of the documents to the Chapter 7 Trustee. The Trustee will then review the documents in preparation for liquidation of the assets.

About a month later, the PMK and I attend a hearing called “the meeting of creditors” or the “341(a) meeting of creditors.” The Trustee will swear in the PMK and ask the PMK a series of questions. The Trustee asks the questions to understand the history of the case, the company’s asset profile, and other pertinent facts. Creditors are also permitted to attend the hearing and ask the PMK questions.

Generally the questions are aimed at finding out if there were any assets that weren’t disclosed. Creditors want to know how they will be repaid if they aren’t paid in full through the bankruptcy.

Sometimes those meetings can really get quite heated, especially if a small investor is present who lent money to the business and now faces the possibility of losing a great deal of money. Eventually, the Trustee will end the hearing.

The Trustee will gather all of the business’s assets for orderly liquidation. If there are lots of assets, then a Trustee may need to assume a lease at the facility to store them prior to the auction. Ultimately, the trustee will hold an auction to sell the assets. The auction will take place in the Bankruptcy Court before the judge assigned to the case.

Once the Trustee has liquidated as many assets as possible, the remaining assets are abandoned back to the business owner.

Once the trustee has the money from the liquidation, the Trustee will review all the proofs of claim the creditors have filed in the case, and prioritize them according to the priorities listed in section 507(a) of the Bankruptcy Code. The Bankruptcy Code gives certain creditors better treatment than other creditors. For example, secured creditors get the best treatment of all because their claims are secured by physical assets.

Eventually the Trustee will get permission from the judge to distribute the money. After all the checks clear, the Trustee will file a final report and the court will close the case — without the business receiving a discharge. Remember, businesses cannot get a Chapter 7 discharge.

That’s a basic overview of what a business Chapter 7 bankruptcy looks like.

For more information on Chapter 7 Business Bankruptcy Process In CA, a Free 20 Minute Phone Strategy Session is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.