Is It Better To Just File For Bankruptcy Or Should I Just Dissolve My Business?
The answer to this question depends on whether the business is viable. If it is, then a reorganization may be the best approach. If it isn’t, then we consider several factors to determine the best course of action.
The first factor is whether the business has any assets. If a company is going out of business and elects to use the bankruptcy process by filing a Chapter 7, then the Court will appoint a Chapter 7 Trustee to the case.
Suppose that business has no assets. In that case, there’s nothing for the Chapter 7 Trustee to do because the Trustee’s primary function is to seize the business’s assets and liquidate them for the benefit of creditors. Therefore, in practical terms there is no point in filing a Chapter 7 bankruptcy if the company has no assets whatsoever. In fact, one of the judges here in the Central District of California sanctioned an attorney $30,000 for filing a business Chapter 7 when there were no assets to be liquidated by the Chapter 7 Trustee.
Now, suppose then that the business does have assets. The business owners might not want to liquidate the assets, so they file a Chapter 7, give all the assets to the Chapter 7 Trustee, and wash their hands of the matter. That may make sense in some scenarios. There is also the additional wrinkle that the business owner or owners, as the case may be, may have personal liability on some of the debts. If the Trustee distributes to the creditors less than they’re owed, those creditors may go after the business owners to collect the unpaid portion of the debt.
One of the dirty little secrets that is not often discussed is that Chapter 7 Trustees tend to take a lot of the bankruptcy estate for their efforts and the services of the various professionals they hire as part of the process. Therefore, to maximize the payout to the creditors, a business owner might do the liquidation without involving a Chapter 7 Trustee as middleman. But then, of course, the business owner has the headache of having to do the liquidation, and contact the creditors to see if they will accept lesser amounts. If there are many creditors, this can be an enormous task.
It is entirely dependent on the facts of the case. If there are many creditors, perhaps it’s simpler to let the Chapter 7 Trustee take control, with the understanding that if the owners sign personal guarantees, there may be problems after the case. If there are no personal guarantees, then the business owner might conclude that it’s better to give the liquidation headache to the Trustee.
I’ve had business owners ask that very question posed above. In some cases, we concluded that it didn’t make sense to file for bankruptcy because there were no assets to be liquidated. Just file papers of dissolution, and then deal with the creditors.
Other times, there are many assets. I remember doing bankruptcy for a store that sold flooring. This was many years ago. The store had many different types of flooring in stock, which was not going to be an easy liquidation. The business owner decided it was not worth the time, and opted to file a Chapter 7. The Chapter 7 Trustee had to work hard to sell some of that stuff, but when it all ended, the business owner had no personal liability because the owner had not signed any personal guarantees. Again, it’s very fact-specific.
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