An LLC is a new form of business enterprise that can be termed as a cross between a partnership and a corporation. It does not mentioned in bankruptcy laws. The LLC business entity was not in existence when bankruptcy laws were formulated more than 3 decades ago. This is one reason why most LLC business owners are unsure how their company will be dealt with under LLC bankruptcy laws. Bankruptcy courts typically treat a LLC like a corporation.
When an LLC is owned by one individual, then the bankruptcy court can treat the LLC bankruptcy as a sole proprietorship bankruptcy, depending on the merits of the case. If the LLC is treated like a sole proprietorship then the court may require it to file for bankruptcy under Chapter 7, which is liquidation. The assets of the business owner and the business may be treated as business assets. The assets could be sold and the sale proceeds will be utilized to pay off the creditors. Anything left over goes back to the owner. This happens because sole proprietors often mingle their personal accounts with business accounts and give personal guarantees for the loans taken by the business.
An LLC can file for Chapter 7 bankruptcy or Chapter 11 bankruptcy. Chapter 7, as mentioned in the last paragraph, is liquidation. The bankruptcy court appoints a case trustee who determines the assets that can be sold and then he sells these assets and pays off the creditors. After the Chapter 7 bankruptcy process is completed, the LLC ceases to exist. This is how Chapter 7 LLC bankruptcy laws work.
Chapter 11 of bankruptcy laws is a reorginization plan. It gives an LLC more time to repay its creditors. The company gets some breathing space, the creditors recover their money, and the state and nation continue to earn their taxes. Chapter 11 bankruptcy is also referred to as business reorganization.
The LLC business owners file their financial statements and a reorganization plan with the relevant bankruptcy court. The bankruptcy court then directs the business owner to act as the case trustee (except in cases of fraud and misrepresentation). The case trustee (i.e., the business owner/s) then informs all the creditors and a committee of creditors is formed, This committee then votes on the reorganization plan. If a majority of creditors agree to the reorganization plan, then the court gives it its seal of approval clearing the way for the execution of the plan.
LLC bankruptcy laws then require the LLC to stick to the plan and successfully execute it per its terms. If the LLC defaults or steers course, then the bankruptcy process fails and creditors can pursue legal action against the LLC. However, if the LLC sticks to the plan, then it becomes debt-free after the plan is executed. The bankruptcy court enters a final decree and the company can make a fresh start all over again.
Other Business Bankruptcy Articles:
Business Bankruptcy
Bankruptcy Of An LLC (Limited Liability Company)