Small Businesses Continue to File for Chapter 7 Bankruptcy Protection

Under bankruptcy law, both individuals and businesses may file for Chapter 7 debt relief. With today's economy still lagging, small businesses are still turning to Chapter 7 to liquidate their outstanding debts. While individuals seeking Chapter 7 protection typically get a fresh start, the result of filing is very different for businesses, which many times must sell off any assets and shut down. A business owner should consult an experienced bankruptcy attorney about the potential impact and outcomes of Chapter 7 bankruptcy before filing.

Bankruptcy Trends

In 2010, there were more than 1.1 million Chapter 7 bankruptcies. This was an eight percent increase from the over one million Chapter 7 filings in 2009. Business bankruptcies usually account for a small percentage of the total annual bankruptcy filings in the U.S. There were 56,282 businesses that filed for bankruptcy in 2010, which was a seven percent decrease from the 60,837 filings in 2009. Although it is difficult to isolate whether businesses are actually doing better, these recent trends show that many are still suffering.

Filing Chapter 7

According to bankruptcy law, businesses may file Chapter 7 to help eliminate unsecured debts. If a business qualifies and files for Chapter 7 debt relief, the bankruptcy judge assigns a trustee to liquidate any assets and administer profits to the creditors. Both administrative and legal fees are paid before these creditor distributions. Company shareholders are not guaranteed any payments after a business files for bankruptcy, but if any money is available after all debts are paid off, they may try to claim a settlement.

Impact on Businesses

Bankruptcy trustees may allow some businesses that file Chapter 7 bankruptcies to operate for a short time, but these businesses typically close after all assets are sold and disbursed. However, some divisions of larger companies may be sold as part of the liquidation phase, so a number of employees may be able to keep their jobs despite the bankruptcy filing. In addition, if employees must be laid off, any claims for wages, salaries and commissions are among the first to be paid when the trustee doles out proceeds from liquidation sales.

Bankruptcy Preparation

If you are currently a business owner considering a Chapter 7 bankruptcy, you should consult a local bankruptcy attorney before filing to ensure that it is the best option for you and your business.