Can I file a chapter 7 bankruptcy for my small business?
The short answer is yes, you can always file a chapter 7 petition for your small business. The more complicated question is whether you should.
1. Reasons to file a chapter 7 petition for a small business
A. Orderly distribution of remaining assets - if your small business has any remaining assets (cash, inventory, receivable accounts), you can essentially deposit those assets with the bankruptcy court and have the assets distributed to your creditors through the court. This process puts every creditor on notice and provides them the opportunity to make a claim on any assets.
B. Stops the meter on continuing expenses - if your small business has a property lease or lease on equipment, the bankruptcy filing will terminate those leases and cut off any future liability. This is particularly important if you have a long term lease and have to abandon it early.
C. Lawsuit avoidance - when any bankruptcy petition is filed, the person or company is affirming under oath that the petition is correct and that all assets and liabilities are listed. Because potential creditors can see the whole picture of a company's financial picture, they can make a better decision as to whether a lawsuit against your company is a good idea. A creditor who sees that a company has little or no assets and multiple other creditors will often just write off an outstanding debt rather than try to sue a company that will probably not be able to pay any judgment.
D. Deters lawsuits against corporate officers - as part of a bankruptcy case for a small business, the entirety of the company's recent financial affairs will be examined by the trustee. The trustee typically examines a company's books for unallowed payments to insiders and principals. The trustee's determination that a company's expenditures were all within reason will often deter creditors from pursuing further legal action against the company or its officers.
2. Reasons not to file a chapter 7 petition for a small business
A. The business will not receive a discharge of its debts. Instead, the company will essentially be dissolved and cease to exist, so that there is no company to be sued by creditors. It is important to note that a chapter 7 filing for a business does not relieve any personal guarantees you may have given for debts of the business.
B. The company will have to publicly declare its assets and expose them to possible liquidation by the trustee. If your company has any particularly valuable equipment or technologies, then those will become part of the bankruptcy estate and may be sold by the trustee to pay the company's creditors.
C. Your company may have made payments to certain employees, shareholders, or creditors that are avoidable by the trustee, or that may raise issues of corporate malfeasance by creditors outside of bankruptcy court. Consultation with an attorney is the best way to determine if there are any payments that could expose you or your company to liability in bankruptcy court or in the civil legal system at large. This is one area where knowledge is the only acceptable option; failing to investigate potential liability is inviting unnecessary trouble.