How to File Bankruptcy for an LLC: 7 Steps From Member Consent to Petition

The petition that places an LLC in bankruptcy is the last page produced, and most of the decisions that determine its fate are made in the weeks before anyone fills it in. A company files through its members or managers, through a lawyer, and through a set of federal forms written for what the judiciary calls non-individual debtors. Each channel carries its own requirement, and a missed requirement tends to produce a dismissal rather than a delay.

The seven steps below follow the order in which the work arrives, from the operating agreement to the filing fee. They describe how to file bankruptcy for an LLC. Whether the company should file, and under which chapter, is a judgment that belongs to counsel.

1. The Operating Agreement Is the First Filing Document, Though No Court Receives It

Before any federal form, there is the operating agreement. It names who manages the company, lists the decisions that require a vote of the members, and may place a bankruptcy filing among the actions that require more than a majority. Federal law defers to it. Since Price v. Gurney in 1945, courts have treated the authority to put an entity into bankruptcy as a creature of state law and the entity's own governance, and a petition signed without that authority is exposed to dismissal.

An agreement that says nothing about bankruptcy still says something about voting, and those voting provisions then govern the decision. Where no agreement exists at all, the state's LLC statute supplies default rules, which differ from one state to another and which counsel will need to read against the company's formation papers. Owners of small companies sometimes discover at this stage that the agreement they remember was never signed, or was signed by one member of two, and the question of authority becomes a question about what the members actually did over the years, which is a harder thing to establish than a signature.

2. The Consent Should Exist on Paper Before the Petition Does

Whatever vote the agreement requires should be recorded in a written resolution or written consent, dated before the petition and naming the person authorized to sign it. The official petition makes the connection explicit. Item 17 of Official Form 201 requires the "authorized representative of debtor" to declare under penalty of perjury, "I have been authorized to file this petition on behalf of the debtor." The resolution is the paper behind that sentence.

A resolution approving a Chapter 11 filing should not be stretched to cover a Chapter 7 petition, and one that names a manager who has since resigned authorizes very little.

3. Counsel Comes Before the Chapter

An LLC cannot file for itself. The federal judiciary's instructions for non-individual filers put it plainly: "Non-individual debtors must be represented by an attorney." The lawyer is engaged by the company, or, to be exact, by the company as it will exist once the case begins, and that distinction produces a set of disclosure rules an ordinary engagement letter never meets.

Under 11 U.S.C. 329(a), counsel must file a statement disclosing what the company paid or promised to pay for legal work in the year before the petition, and where that money came from. Bankruptcy Rule 2016(b) sets the deadline at 14 days from the order for relief. If the company files under Chapter 11 and operates as debtor in possession, its lawyer's employment requires court approval under section 327 and an application disclosing the lawyer's connections with the debtor, creditors, and the U.S. trustee, supported by a verified statement.

A retainer paid from an account a funder claims, or paid by a member personally, is exactly the kind of fact those disclosures will surface.

4. Chapter 13 Is Closed, and Chapter 7 Offers No Discharge

Only an individual may be a Chapter 13 debtor, so the LLC chooses between Chapter 7 and Chapter 11, including the Subchapter V track for qualifying small businesses. Chapter 7 liquidates the company through a trustee and, because section 727(a)(1) denies a discharge to any debtor that is not an individual, ends without one. Chapter 11 keeps the company operating while it proposes a plan. The choice is recorded by checking a box in item 8 of Form 201.

5. Several Papers Must Accompany the Petition on the Day It Is Filed

Form 201 opens the case, but it does not travel alone. The judiciary's filing instructions require, on the filing date, a list of the names and addresses of all of the debtor's creditors, formatted as a mailing list according to the local court's instructions ("the bankruptcy court may call this a creditor matrix or mailing matrix"). In Chapter 11, Official Form 204, the list of the 20 largest unsecured creditors who are not insiders, must also be filed with the petition under Bankruptcy Rule 1007(d).

Rule 1007(a)(1) adds a corporate ownership statement. Unless it is a governmental unit, a corporate debtor must include a statement with the information described in Rule 7007.1, which means identifying any parent corporation and any publicly held corporation that owns 10% or more of its stock, or stating that none exists.

But the ownership statement reads oddly for an LLC, which issues membership interests rather than stock. The Code defines a corporation to include an "unincorporated company or association," which is why counsel will generally treat the requirement as reaching the company; for a small LLC owned by individuals, the statement will ordinarily report that no such corporation exists. A small business debtor in Chapter 11 also attaches the four financial documents section 1116(1) names, from its latest balance sheet to its federal tax return, or a sworn statement that they do not exist.

6. The Schedules and the Statement of Financial Affairs Carry the Real Weight

The documents that describe the company in detail may follow the petition by 14 days under Rule 1007(c), and the instructions warn that if they do not arrive, "the case may be dismissed." They consist of the Form 206 schedules (Schedule A/B for property, D for secured creditors, E/F for unsecured creditors, G for executory contracts and unexpired leases, H for codebtors, and a summary of totals), Official Form 207, the Statement of Financial Affairs for non-individuals, and Form 202, the declaration under penalty of perjury that binds the signer to all of it.

Schedule H deserves attention in an LLC case. Every member who signed a personal guaranty appears there as a codebtor, and the list becomes a map of who remains exposed when the company's case ends.

Form 207 reaches backward. Line 3 asks for payments to creditors within 90 days before filing, above a threshold of $8,575 per creditor in aggregate. Line 4 asks for payments within one year that benefited an insider, a term the form explains as including officers, directors, anyone in control of a corporate debtor, and their relatives. Line 13 asks for transfers outside the ordinary course within two years. Line 30 asks whether, within one year, the company gave an insider value "in any form, including salary, other compensation, draws, bonuses, loans, credits on loans," and several items more. For an LLC whose members took distributions while the merchant cash advance debits were running, those lines are where the preceding year becomes a sworn account.

The member who signs Form 202 will usually be the same person examined under oath at the meeting of creditors, which the U.S. trustee must convene between the 21st and the 40th day following the order for relief in a Chapter 7 or Chapter 11 case. The signature on the declaration and the testimony at that meeting should describe the same company.

7. The Fee Is Paid in Full, in a District the Statute Permits

A company filing Chapter 7 pays $338 at filing ($245 filing fee, $78 administrative fee, $15 trustee fee). A company filing Chapter 11 pays $1,738 ($1,167 filing fee and $571 administrative fee). The installment and waiver provisions in 28 U.S.C. 1930 refer to individuals, so an LLC pays the full amount on the day it files.

Venue follows 28 U.S.C. 1408, which permits filing where the company's domicile, residence, principal place of business, or principal assets in the United States were located for the 180 days before filing, or for the longer portion of that period, or where an affiliate's case is already pending. The clerk issues a receipt.

Where a Negotiated Resolution Enters the Sequence

Delancey Street is not a law firm and takes no part in any of the seven steps; it cannot draft the resolution, sign the petition, or appear for the company. What it offers sits earlier, at the moment a company is still weighing the petition against an agreement with its merchant cash advance funders and other business creditors: a free, confidential initial review, with independently licensed counsel coordinated for any matter that is legal in nature. A company whose members have already voted to file, or whose bank account is under levy, should be speaking with bankruptcy counsel before anyone else.

An LLC is a set of agreements that the members made with one another long before any creditor appeared. The filing asks whether those agreements still hold.