A LLC (Limited Liability Company) is a convenient form of doing business. The company owners get the twin benefits of corporate limited liability and a partnership-like tax treatment. However, when a LLC is weighed down by a mountain of debt that it can no longer service, or needs more time to pay off its debts, then it must file for bankruptcy either to close down the business or reorganize it.
State bankruptcy courts can treat LLC companies as a partnership or a corporation, as it is a combination of these two business entities. So, how can a LLC file for bankruptcy?
Here are the steps:
1. The LLC must first determine if the business is still viable. If it is and the LLC feels that it can pay off its debts if it is allowed to continue doing business, then it may file for bankruptcy under Chapter 11, which will allow it to reorganize its business and pay off its creditors over a fixed period of time. The LLC has to file a Reorganization plan (along with other financial statements), which the case trustee gets approved by the creditors. The LLC then executes the approved Reorganization Plan. If there is no hope left, and the LLC’s management is convinced that business cannot go on, then the company may file for Chapter 7 bankruptcy, in which all its legally-exempt assets are sold and the money realized is used to repay debts. Both these Chapters are supervised by a state bankruptcy court.
2. The company must find out if it is eligible to file for bankruptcy, and also check the state laws on bankruptcy and exempt assets. It can do this by visiting the appropriate the court’s and the state’s websites. It must appoint a lawyer because bankruptcy is a complicated process and the LLC can end up losing more than it bargained for. The company may also seek advice from its financial controller or auditor before filing a petition.
3. Once all the bankruptcy law knowledge and advice is in place, the company can file a relevant application in the court. If it files a petition under Chapter 11 (Reorganization plan), then it becomes a “debtor in possession” and is typically required to act as the case trustee. It should do so diligently and get majority of the creditors to approve its Reorganization Plan.
4. If the Reorganization plan is approved, then the LLC must follow what’s agreed. Any deviation or default on any of the plan’s terms nullifies the whole bankruptcy process, and the LLC be sued by its creditors.
5. If the company sticks to the plan, and discharges its debts as agreed, then a final decree is entered after the reorganization plan is fully executed. The company keeps conducting its business while executing the reorganization plan. After the plan is executed, the company becomes debt-free.
6. Under Chapter 7 there is no reorganization – only liquidation. A case trustee is appointed and he sells the company’s legally-exempt assets and pays off the creditors. After the bankruptcy process is over, the company ceases to exist.
This is how an LLC bankruptcy works. Finally, remember to consult your financial advisor and lawyer before filing any petition, or before even considering bankruptcy.
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