Will The Automatic Stay Go Into Effect If I File A Chapter 7 Business Bankruptcy?

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Whenever a debtor files a bankruptcy petition under any chapter, a stay is triggered. The debtor doesn’t have to do anything else, so it’s called the automatic stay. A stay in law says, “Stop.” Whatever is stayed must stop immediately. The automatic stay prevents the creditors from taking any action against the debtor, against the debtor’s possessions, and against the bankruptcy estate that is created by the filing of the petition.

However, there are a few exceptions to the stay. They are listed in section 362(b).

In addition, if there were prior bankruptcy cases that were pending during the 12 months before the filing of the current case, then the automatic stay terminates 30 days after the filing of the new case, unless the bankruptcy judge assigned to the new case enters an order prior to thirty-day mark, continuing the stay.

The purpose of the stay in a Chapter 7 business bankruptcy is to let the Trustee liquidate the assets and pay creditors in an orderly fashion. This prevents creditors from swooping in like birds of prey, to grab assets. It’s sometimes referred to as preventing the race to the courthouse. In other words, it prevents a creditor who knows that the debtor is in financial trouble, from successfully suing the debtor and grabbing assets, thus leaving the other creditors out in the financial cold.

Is A Chapter 7 Business Bankruptcy The Same As Filing A Chapter 7 Personal Bankruptcy?

No, they are not the same. In a Chapter 7 personal bankruptcy, the goal is for the debtor to discharge, or eliminate, as much debt as possible. Some assets may be liquidated, but in most cases the debtor keeps all assets.

In contrast, in a Chapter 7 business bankruptcy, there is no discharge of debt, and all the assets are liquidated. At the conclusion of a Chapter 7 business bankruptcy, the business ceases to exist. As a consequence, the business doesn’t receive a discharge because it no longer exists.

Is A Trustee Going to Be Appointed In A Chapter 7 Business Bankruptcy? What Is The Trustee’s Role?

In a Chapter 7 business bankruptcy, the Court will appoint a Chapter 7 Trustee to the case. The Trustee takes possession of the business and liquidates it, either as a going concern, or more commonly in a piecemeal sale of all the business’s assets.

After the liquidation, the Trustee will distribute the proceeds to the creditors after obtaining Court approval. The Trustee must file a tax return for the business and dissolve the business.

The Trustee may hire a CPA to file the tax returns, and a forensic accountant to look through the documents that the debtor provided. It’s possible that a creditor has filed a fraudulent or inflated proof of claim. If this happens, the Trustee may hire an attorney to prosecute a claim objection. After all, the Trustee doesn’t want to incur liability by overpaying one creditor more than its fair share. The duties of the Trustee can be quite complicated, but essentially they involve taking possession of the business, liquidating it, and using the proceeds to pay creditors.

For more information on Automatic Stay In Chapter 7 Business Bankruptcy, 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.