No-Asset Chapter 7 for a Business: 5 Reasons Some Owners Skip It Entirely

If your company is closed and has nothing left to sell, you might wonder whether you still need a business Chapter 7 bankruptcy. In many cases, there is nothing in it for you. This kind of case never gets a discharge, never protects the owner of the company from personal liability for company debts, and these cases are subject to extra scrutiny. Here are five reasons why that may make filing a Chapter 7 unnecessary and expensive.

The benefit for the debtor is a discharge, and that’s why people file bankruptcy. And that is unavailable to businesses and corporations. Bankruptcy Code section 727 prohibits a business from getting a discharge. You can still put in a Chapter 7 bankruptcy case for the company, and when that happens, any debt the company owes to unsecured creditors is never wiped out. At the end of the case, the trustee normally files a report telling the court that the company had nothing (also called ”no assets”), unsecured creditors get nothing, and the case closes. So you could file--but there is no end of the company debts.

The Owner Is Personally Liable

In order to get a small business loan, many lenders want a personal guarantee from the owners. This means that in a situation where the company can’t pay the loan, the owner is personally liable. For the most part, filing a business chapter 7 doesn’t help you there either. Your personal guarantee isn’t eliminated, and the creditor can go after you personally. One of the side effects of filing for bankruptcy protection is that an injunction is created called the automatic stay. It’s an important protection, but for businesses, it’s important to note that it only applies to the debtor--not the owner. First, the owner still faces the creditor who sues in state court, gets a judgment against the owner personally, and starts garnishing the owner’s pay or savings. None of these have anything to do with a federal bankruptcy proceeding, and remain unaffected after a business Chapter 7 bankruptcy closes. Second, the owner can be targeted by the IRS for the employee payroll taxes that were not paid by the company. In other words, a person in charge of the company who willfully fails to pay withheld employee payroll taxes can be personally penalized for the unpaid amount.

Cases like this get special attention by the bankruptcy trustee, and are often carefully reviewed by a federal government department (US Trustees Office, Department of Justice). With respect to payments made to insiders (usually also owners) in the year before filing, the trustee can require the owner to pay them back to the bankruptcy estate. Where the owners personally got money out or where corporate funds are put to another company the owner owns, there is a risk the trustee will file a complaint (law suit) against the owner to make the officer pay the money back to the company. And once the Chapter 7 case is underway, the debtor cannot dismiss it.

Pay Out of Pocket

Putting in a Chapter 7 case doesn’t come free of charge. The problem here is that the debtor (the company) has to be represented by a law firm. Business chapter 7 cases require a fee to the bankruptcy court of $338 payable when the case is filed. A fee of $2,000 and up is typical for a simple case. Fees go up based on complexity, so the specific fee for your case depends on the number of creditors. In a no-asset case, the attorney can get paid for his/her work, and then creditors may get zero. If your company is closed, do you really need to pay out of pocket to benefit no one?

Other Options

If the goal is to close the company permanently, it doesn’t necessarily require a bankruptcy filing. Other options may work better--or worse. For one thing, the company could be dissolved. Also, there is just letting a business die on the vine, and that is a riskier move since the debts stay and the company can be at risk of attack from aggressive creditors. Assignment for the benefit of creditors (“ABC”), a purely state law process, is another possibility. The owners choose a fiduciary and that person sells the assets and pays creditors to the extent possible. It generally has less court involvement and oversight than a traditional bankruptcy case.

Nolo says that for many owners, it may make more sense to file a personal Chapter 7 instead of a corporate one. A personal bankruptcy can wipe out personal guarantees.

Business chapter 7 cases have their place. If you have claims and lawsuits pending, and the other side has already filed suit, going for the corporate chapter 7 may help. The automatic stay applies against all lawsuits against the debtor (the company).

Have you explored alternatives? Where are the debts owed, and are there valid personal guarantees on the debts you owe? A business bankruptcy can still make sense, and these are considerations to talk over with a competent business bankruptcy attorney.