Will Chapter 13 Bankruptcy Work for You?

« Back to Home

Three Cases In Which You Shouldn't Use Chapter 7 Bankruptcy For Business

Posted on

Both individuals and businesses can file for Chapter 7 bankruptcy. Small businesses routinely use this route to wind down their operations; the responsibility of selling assets and paying back creditors falls into the hands of the trustee. However, not every insolvent small business should go down this route. For example, these three conditions should make you think twice before filing for Chapter 7 bankruptcy for your small business:

You Haven't Decided To Wind Down The Business

Chapter 7 bankruptcy isn't something you try; you either go for it or not. This is because once you start the process, it is not your prerogative to stop it. This is dangerous if you don't want to close your business because the bankruptcy court may force you to close it down either temporarily or permanently. Even if the court doesn't order the closure of the business, you may lose valuable assets (when the trustee uses them to settle your debts) that may force you to close down the business. Therefore, you should only take the plunge if you aren't too concerned about closing down the business.  

The Main Difficulties Aren't Financial Ones

Bankruptcy isn't something you file for when anything is wrong with your business. You only take the bankruptcy route if you are unable to pay your creditors. You may be tempted, for example, to file for bankruptcy if your business is under investigation for improper conduct, and you suspect you will lose the case. That would be a dangerous mistake because the investigation may not end with the bankruptcy, and you are likely to be charged with abusing the bankruptcy process. In fact, you may be penalized heavily for your actions.

The same reasoning applies to businesses that apply for bankruptcy when facing civil lawsuits. The lawsuits will continue because the automatic stay on applies to creditors suing for money. Analyze your reasons for fling the bankruptcy before making the move.

The Business Has Tax Numerous Tax Debts  

Many tax debts aren't dischargeable if a small business applies for Chapter 7 bankruptcy. These include recent back taxes and trust fund taxes. Trust fund taxes are money withheld from employee's wages to be paid to the treasury, such as Medicare taxes. Even debts related to taxes, such as the ones you took to pay non-dischargeable taxes or cash advances you took to settle your tax bill, are not dischargeable. Therefore, if you have too much tax obligation, it may not be a good idea to file for Chapter 7 bankruptcy. Contact a company like McFarland & Masters LLC for more information.