If you have a small business and you are struggling financially, no doubt you’ve considered filing a Chapter 7 bankruptcy.  If the business is operated through a corporation, then for the business to get bankruptcy protection, a corporate bankruptcy would need to be filed.

You can consider filing a Chapter 11 Reorganization or a Chapter 7 Liquidation.  A Chapter 11 bankruptcy should be filed only if there is a realistic opportunity to turn the business around.  After filing many, many Chapter 11 cases over the last 25 years, I’m confident that if a business owner seeks the advice of an experienced bankruptcy attorney early enough, then many businesses can be saved.  Unfortunately, due to a number of reasons, including pride and wishfulness, many business owners wait until there is simply nothing but a carcass left in the business before consulting with me.  So we are often left with Chapter 7 bankruptcy being the only choice.

Recognize that unlike an individual who files a Chapter 7 bankruptcy, a corporation does not receive a discharge of its debts.  A Chapter 7 Discharge is a federal court order that says you no longer owe the debts listed in your bankruptcy papers.  The discharge gets the debtor what is known as a “fresh start.”

However, it doesn’t work that way with a Chapter 7 bankruptcy.  Since there is no discharge, there will be no “fresh start.”  If that is the case, then why go to the time and expense of filing a Chapter 7 bankruptcy for a corporation?  There are actually a number of reasons:

• It makes the phones quit ringing.  When creditors get a notice of the filing of a bankruptcy, whether a Chapter 7, Chapter 11 or Chapter 13, they immediately know that can’t take any further action to collect the debt from the Debtor (in this case the corporation) or the assets of the Debtor.  The result:  the harassing calls you’ve been getting stop.

• Lawsuits stop.  The Automatic Stay that prohibits collection calls also puts a stop to new lawsuits, and pending lawsuits.

• The remaining assets of the corporation are liquidated in an orderly fashion.  Rather than someone who has gotten a judgment seizing the remaining assets of the business, the Chapter 7 Trustee will liquidate the assets in an orderly fashion.  The net proceeds of a sale of the company’s assets will be paid to the company’s creditors pro-rata based upon claims that are filed.  This often creates value for the small business owner because unpaid taxes have a high priority.

• Taxes may get paid before other unsecured creditors.  Often a symptom of a failing business is unpaid taxes.  The owner of a corporation who makes the decision to pay himself or other creditors rather than paying corporate taxes to the IRS often finds himself with what is known as “trust fund liability.”  This means that if the corporation doesn’t pay, the owner will ultimately pay.  In a Chapter 7 liquidation, one of the first creditors to be paid in order of priority is tax creditors, the IRS and the State of Tennessee.  That’s good because if they get paid from the assets of the business, then the business owner will not have to pay them from his own assets.

So here are 4 good reasons a business owner might decide to file a Chapter 7 bankruptcy rather than allowing the creditors to battle it out against themselves outside of bankruptcy.

If you have a small business and are wondering where to turn, be sure to seek the advice of an experienced bankruptcy attorney.  We help individuals and businesses from Knoxville, Sevierville, Maryville and Jefferson City evaluate the options available during these difficult times.  Call and set up a free consultation with Knoxville Bankruptcy Attorney Dan Scott at 865-246-1050 today.

Photo Credit: Flickr:  Ocean.flynn