By: Jamie Harris
For many small business owners of distressed companies, Chapter 7 bankruptcy may provide some necessary relief. In evaluating whether your company could benefit from Chapter 7, the first issue is whether you want to continue to operate your business. Chapter 7 is a liquidating bankruptcy where the company will typically cease operations after filing for bankruptcy relief. If your focus is on reorganizing your company, then you need to explore Chapter 11 bankruptcy or workouts with creditors. Chapter 7 tends to be best-suited for companies that have assets remaining to be liquidated but the companies cannot effectively defend against numerous creditor lawsuits outside of bankruptcy. Hence, the Chapter 7 bankruptcy provides a convenient forum to address liquidation of the company and payment of creditor claims in priority under the Bankruptcy Code to the extent funds is available. The automatic stay of bankruptcy is an immediate and powerful injunction against creditor collection.
Shortly after filing for Chapter 7 relief, a Chapter 7 Trustee is appointed to the case who oversees liquidation of any assets with value. If all corporate assets are subject to the liens of secured creditors, then those creditors will seek relief from the automatic stay to foreclose on their security interests. If there are no assets to be liquidated for the benefit of creditors, then the Chapter 7 Trustee will close the bankruptcy case out as a no-asset case.
Assets identified by Chapter 7 Trustees as valuable include more than tangible assets. Trustees can also pursue Chapter 5 avoidance actions such as preferences and fraudulent transfers. Preferences involve pursuing recovery of payments to non-insider creditors within 90 days of filing for relief and a year prior to filing for insiders (owners, officers, and relatives). Fraudulent transfers are transfers for less than equivalent value. An additional factor to evaluate for filing for Chapter 7 relief is whether claims may exist against you as an owner/officer for preferences or fraudulent transfers. Since a corporation cannot represent itself in a Chapter 7 bankruptcy proceeding, you should consult with a bankruptcy attorney for your specific concerns as a small business owner to determine if Chapter 7 is an option for your company.
About DelCotto Law Group
DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy, complex litigation, and estate planning. For more information about filing bankruptcy or DelCotto Law Group, please call (859) 231-5800 or email [email protected]