The recession has taken its toll on small businesses forcing many to file for bankruptcy without exploring other options. LLCs are a new form of business and they are treated like corporations when it comes to their bankruptcy process. When a LLC company goes deeply in debt and is unable to pay what it owes it is vulnerable to aggressive crediotrs. The LLC is most likely threatened by legal action, and if it finds itself in a deep hole, then it should consider filing for protection under bankruptcy laws.
LLCs are a unique and convenient type of business entity. They enjoy the flexible tax status that are applicable to partnerships, plus, they enjoy the limited liability status conferred to a company. A limited liability status means that the personal assets of the owners are kept separate from the business assets and in case of bankruptcy, the owners’ personal assets are not impacted. However, most lenders give credit to LLCs only if the credit is secured by personal guarantees issued by the owners. When a personal guarantee is issued for business loans, then the personal assets of business owners may be treated as business assets in a LLC business bankruptcy case.
An LLC business bankruptcy can be filed under Chapter 7 or Chapter 11. Chapter 7 is a liquidation, while Chapter 11 gets the company some more breathing space in the form of extra time to repay its debts. However, one key factor that businesses must know is that federal agencies like the IRS will hold the business owners personally liable for unpaid taxes and other priority debts.
In a Chapter 7 bankruptcy, the court appoints a case trustee who first determines a list of non-exempt assets that can be sold to pay the creditors’ dues. The assets are then disposed and the money is distributed among the creditors. After the Chapter 7 LLC business bankruptcy process is complete, the LLC ceases to exist.
A Chapter 11 bankruptcy is referred to as business reorganization bankruptcy. LLCs that feel that the business can pull through if it is given more time to repay its debts can seek protection under Chapter 11 by filing a petition with the relevant bankruptcy court. A reorganization plan is submitted to the court and a committee of creditors is formed. The committee of creditors votes on the reorganization plan and if a majority of the creditors agree, the plan gets approved by the bankruptcy court. If it is not approved, then it’s back to square one for the company, which must draw up another plan that finds favor with its creditors.
The company then must execute the plan to perfection and any variation will amount to failure of the bankruptcy process. If the plan is successfully executed, a final decree is entered and the company becomes debt-free.
Other Business Bankruptcy Articles:
Business Bankruptcy
Bankruptcy Of An LLC (Limited Liability Company)