Corporate and LLC Bankruptcy

When an individual goes through a chapter 7 bankruptcy he gets a fresh start. His financial life goes on without all the debt. The debts are discharged.

But when a corporation or LLC goes through a chapter 7 bankruptcy the corporation or LLC does not get a fresh start. The corporation or LLC is terminated in the bankruptcy proceeding.

It is liquidated under the supervision of the bankruptcy court. The debts of a corporation or LLC are not discharged in a chapter 7 bankruptcy.

So, you might be asking: If all a bankruptcy does for a corporation or LLC is ending its existence why go through the trouble and expense of having a corporation or LLC declare bankruptcy?

The answer is that it rarely makes sense for a corporation or LLC to go through a chapter 7 bankruptcy. If you want to end the life of your corporation or LLC you can liquidate it yourself without the supervision of the bankruptcy court. Or you might be able to just abandon it without a formal liquidation.

You might ask: But I hear about corporations and LLCs going through bankruptcy. Why are you saying it rarely makes sense?

It may make sense for a corporation or LLC to file for a chapter 11 bankruptcy. This allows the corporation or LLC to reorganize. The corporation or LLC continues to exist but its debts are reduced or eliminated. The court can change the terms of the debts the corporation or LLC owes in a chapter 11 bankruptcy.

Unfortunately, chapter 11 bankruptcies are complex and expensive. Most bankruptcy attorneys do not handle them.

Chapter 13 is similar in that it allows your debts to be restructured and isĀ far less complex and expensive than chapter 11. But chapter 13 is only available to individuals. It is not available to corporations, LLCs, or other entities.

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