Why those closing a small business may file for bankruptcy

On Behalf of | Oct 11, 2023 | Bankruptcy |

There are a variety of scenarios in which an individual may feel compelled to file for bankruptcy or business bankruptcy. An entrepreneur or business owner who has come to the realization that either restructuring their debt or closing down a business is likely their best option may want to file for a business bankruptcy as part of that process.

Particularly when an organization became insolvent due to economic challenges and has outstanding debts without enough resources to cover those costs, a Chapter 7 business bankruptcy filing could be a smart move.

How a Chapter 7 filing can help

Some people call Chapter 7 bankruptcy liquidation bankruptcy. That name comes from how the court may require the sale or liquidation of certain resources. In a business-related Chapter 7 filing, it may be necessary to sell off or liquidate some of the company’s resources to eliminate its outstanding debts.

The owner will provide an inventory of assets and a comprehensive list of all known outstanding business obligations, including unpaid rent and business credit card balances. The sale of business assets will lead to capital that can then help pay some of the organization’s remaining debts. Certain business debts will take priority over others, so it is of the utmost importance that business owners and executives carefully follow the proper process.

After notifying creditors of the filing, attending a creditor meeting and liquidating assets, paying off as much as possible of the organization’s remaining debts is the final step. Those who complete that process will be eligible to ask the courts to discharge whatever balance remains on eligible unsecured financial obligations. The attempt to reduce debts by repaying creditors when possible will minimize the likelihood of the owner having liability for those debts in the future. A Chapter 7 filing can therefore provide another layer of protection for those who worry about their business creditors taking legal action against their personal resources or future income.

Particularly if someone made mistakes early in the business formation process that might expose them to financial liability, filing for bankruptcy when closing an organization could be a smart move.