Everything you need to know about Chapter 7 Bankruptcy in LLCs

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A Chapter 7 bankruptcy is a viable option if your limited liability company (LLC), is facing financial difficulties or has many business debts.

A trustee will be appointed to liquidate any assets of the LLC when it files bankruptcy. This will allow creditors to pay creditors.

Must Read: https://www.finallaw.us/bankruptcy/

What does bankruptcy look like for LLCs?

The automatic stay will be in effect as soon as the bankruptcy petition is filed. An automatic stay stops creditors from pursuing the company’s assets.

The bankruptcy trustee will liquidate all assets of an LLC and distribute them to creditors when it files for bankruptcy. This will take place according to the U.S. Bankruptcy code priority.

  • You can file for Chapter 7 bankruptcy to ensure many things.
  • Creditors have equitable access to assets
  • Creditors are unable to collect their debts.
  • Creditors have a lower chance of bringing lawsuits.

A small business filing for bankruptcy does not allow it to claim property exemptions, unlike a personal bankruptcy. A debt discharge is not available to LLCs. Because the company will cease being an entity after liquidation, creditors will be unable to collect any remaining debts.

  • Personal Liabilities during Business Bankruptcy
  • An LLC is an independent business entity and the owners will not be liable for the debts.

However, there are some circumstances in which you could be personally responsible for debts incurred through the LLC. These are:

Never Miss: https://www.followlaw.co.uk/bankruptcy-and-the-best-option/

You have debts with personal guarantees

Personal guarantees to business debts will make you personally liable. Even after the company receives debt relief it can still be sued by creditors for your assets. You should carefully read any agreements that the LLC has signed regarding debt.

You have incurred personal credit card debt

You will be responsible for any debts you take out on loans or use your credit card to pay the business.

By law, you are liable for your debts

The law makes LLC owners liable for certain debts. These include unpaid payroll taxes and unpaid employment. Unpaid sales taxes may be a personal responsibility.

You failed to keep your personal and business finances separate

Creditors may seek to seize your personal property if you fail to separate your business and personal finances. Creditors can present evidence to the bankruptcy court that you did not comply with state laws regarding LLCs. This could make you personally liable for any LLC debts.

Also Read: https://www.lawprofessional.us/debt-repayment/

You face Fraud and Alter Ego Claims

Creditors can pursue your personal assets if they prove that the LLC was fraudulent or that you tried to hide money from creditors.

You can file personal bankruptcy if you are personally liable for any debts owed to an LLC.

What is the cost to file for Chapter 7 bankruptcy?

The filing fee for bankruptcy is $335. This amount is the same as for personal bankruptcy. Attorney’s fees are an additional cost as it is extremely difficult to file for bankruptcy in a business without the help of a bankruptcy attorney.

The following factors will affect the cost of attorney fees:

  • Sources of income for the company
  • The number of creditors
  • How creditors might bring a lawsuit to break the corporate veil

What about partnerships?

A partnership, unlike LLCs, is not an independent legal entity. The business owners will be responsible for any company debts. It is unlikely that a partnership will file Chapter 7 bankruptcy.

Other options for the LLC

Small business owners of LLCs that are experiencing financial hardships have other options. These options include:

Negotiations outside of court

You can negotiate a payment plan with your creditors to allow the LLC to continue to operate. Try to convince creditors that the proposed plan is better than what they would get if the LLC filed for bankruptcy.

Filing a Chapter 11 bankruptcy

A Chapter 11 bankruptcy can be filed if the LLC members wish to keep the business operating despite the outstanding debts. Chapter 11 bankruptcy allows the company to reorganize and gives the owners more time to pay off the debts.

Most Popular: https://www.preferlaw.co.uk/bankruptcy/

Your plan for how and when to pay your debts will be reviewed by the court and creditors.

Are you planning to file a Chapter 7 bankruptcy for your business? Talk to a Bankruptcy Attorney

If you plan to file a Chapter 7 bankruptcy for your business, you will need to be familiar with the bankruptcy laws and procedures. An attorney can help you with your bankruptcy case.

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