For the owners and officers of a small business, perhaps one of the hardest decisions they may ever have to make is whether or not to file for bankruptcy. No one likes to see a company fail, and having to admit failure through a bankruptcy proceeding is very difficult to do. Making matters worse, in the case of a Chapter 7 business bankruptcy, is the total and absolute finality that comes with the package. In other words, once a company files for Chapter 7 bankruptcy there is no looking back; there is no saving it.
Chapter 7 is a Liquidation
The reality of the Chapter 7 business bankruptcy is that it is really a court-supervised liquidation of all assets, with money from the sales been used to pay off creditors. To make this as simple as possible, imagine your favorite restaurant going out of business and winding up in bankruptcy court. The court would seize all of the restaurants assets including bank accounts, equipment, property, fixtures, office equipment, and so on. All of these things would be sold at auction in order to pay off creditors as much as possible.
Chapter 7 is frequently used by sole proprietors who do not have the financial resources to make it through a reorganization. Sole proprietorships are viewed differently than partnerships, LLC's, and corporations in the sense that the law does not recognize the business and its owner as separate entities. They are one of the same. The other three types of businesses have the vintage of being treated according to law as a separate entity, apart from its owners and officers.
Some Debt Will Remain
One of the things many business owners don't know about Chapter 7 business bankruptcy is that it might not wipe the slate clean of all debts. This is especially true if the company filing the bankruptcy is a sole proprietorship. In all bankruptcies there are certain types of debts that are not dischargeable; debts which the individual or company will be responsible for paying before the process is complete. Examples of these non-dischargeable debts include tax liens, student loans, child support and alimony, and any debts incurred with too little time to allow creditors to file their own summary claims in court.
In the case of the sole proprietor he will be compelled by the court to make good on these non-dischargeable debts even if that means a garnishment of his future wages. For a corporation, partnership, or LLC that decides to use Chapter 7, they also must come up with a plan to pay these non-dischargeable debts before the bankruptcy proceeding is complete.
The Official End
The biggest downside to the Chapter 7 business bankruptcy is that it officially brings an end to the company for all practical purposes. In a medical sense it would be the same as pulling the plug on an individual who's being kept alive only by life support. Once the plug is pulled, death is inevitable. In a Chapter 7 bankruptcy the company will continue to exist on paper for as long as the process takes, but will not be conducting any new business. Once the process is complete, and all the terms of the court are met, the business ceases to exist.
What makes it so difficult for many business owners is that they have invested untold amounts of personal finances and sweat equity into their businesses. For many, the finality of a Chapter 7 bankruptcy is almost akin to a death in the family. It's very difficult to let go of a business you have worked so tirelessly on to ensure its success. Yet once it's done, it's done forever.
The Time It Takes
For sole proprietorships with very little in terms of assets, a Chapter 7 liquidation can usually be completed in just a matter of months. Even if the court seizes some of the personal assets of the proprietor, it still is not complicated and doesn't take long. However, for a corporate Chapter 7 filing things are significantly different. Depending on the type of business, the amount of assets to be sold, and the quality of those assets, it could take years to completely liquidate the business. Owners and partners who decide to utilize Chapter 7 should be prepared for a long, drawn out affair.