When a business finds that it can neither run its operations profitably, nor repay its debts, then it must file for business bankruptcy under Chapter 7. Chapter 7 business bankruptcy amounts to closing down of the business. All kind of businesses (corporations, partnerships, sole proprietorships, etc.) can seek protection under this Chapter when their finances are literally sentenced to death. The company ceases to exist after the Chapter 7 bankruptcy process is completed and that is why Chapter 7 bankruptcy is referred to as liquidation.
The bankruptcy process starts with the business owner filing for Chapter 7 bankruptcy with the relevant court (i.e., the court that has jurisdiction). The petitioner must file the required documents required (financial statements related to assets/liabilities/income/expenditure, tax returns, list of unexpired contracts, statement of debts, debtor’s property list, sources of income, etc.). As soon a business files for Chapter 7 business bankruptcy, all collection actions are automatically stopped. No court order is required to stop this collection action. No creditor can sue the business for default, or call up the business demanding their funds back.
The court then appoints a case trustee who determines the assets that can be sold to pay off the liabilities. The trustee also calls all the creditors for a meeting. The trustee and the creditors query the debtor during this meeting, and the debtor has to be truthfully answer all such questions. The trustee then reports about the proceedings to the court.
The creditors are then ranked – priority debts like taxes, employees’ benefits, etc., are ranked the highest. These must be paid in full before paying off the next class of creditors (fully-secured creditors), and then moving on to other classes like partially-secured and unsecured creditors.
Once the assets and their market value is listed and the creditors are ranked, it is approximately known how much each creditor can get against his debts. The case trustee then sells the assets and utilizes the proceeds to pay the creditors in order of their rank. Chapter 7 bankruptcy laws for business can vary a bit across states because every state adds new rules based on its own business environment and laws.
After the Chapter 7 bankruptcy is complete for the business, it ceases to exist. Sole proprietorships must avoid Chapter 7 bankruptcy because it can put their personal assets at risk. They can instead seek protection under Chapter 13, which is termed as wage earner’s plan. Chapter 7 business bankruptcy works best for corporations and partnerships because their personal assets are not treated as business assets.
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