I’ve discussed before which chapter is best for a New York business bankruptcy. For a business that’s a separate legal entity from its owners, only chapter 7 and chapter 11 are available. Debtors who freelance or work as unincorporated general partners can use chapter 13 as well. Although chapter 11 makes the news when big businesses file bankruptcy, one would think that smaller businesses would be better off in chapter 7—just as individual debtors tend to. This isn’t necessarily true. Chapter 11 doesn’t set a high entry threshold, and chapter 7 doesn’t provide as many benefits to businesses as individuals. Why, then, would a business want to file chapter 7?
One answer is that a discharge isn’t necessary. That’s right, chapter 7 only discharges individuals’ consumer debts, not businesses’ debts. Section 727(a)(1) states, “The court shall grant the debtor a discharge unless the debtor is not an individual.” Corporate entities are not individuals, so no discharge. Rather than discharging debts, chapter 7 dissolves the debtor business, so if dissolution isn’t the business’ goal, then it shouldn’t choose chapter 7.
Second, a business might owe a large number of creditors but can’t repay them all. The goal here is to ensure the creditors are all dealt with fairly and not left feeling like another creditor received an unfair advantage. Similarly, some businesses might want to take advantage of bankruptcy’s priority structure to ensure that more powerful creditors are repaid instead of others. I’m referring, here, to tax authorities. If they’re paid in a chapter 7 business bankruptcy, then any personal obligation that falls to the owners or officers of the business will be less than if some other creditor is paid instead.
Moreover, small business owners can pay up to $10,000 in wages to each employee, which includes themselves and probably family members who are also employed by the company. Debtors can also use the priority system to pay any of the business’ taxes that they would otherwise be personally liable for.
Chapter 7 business bankruptcy isn’t necessarily a difficult process, but owners should see it as an aid to a corporate dissolution with an eye to ensuring some more important creditors are repaid. If your business is running into trouble, then talking to an experienced New York bankruptcy lawyer can help you determine how to use the law best to help your business and achieve your objectives.
For answers to more questions about businesses in bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.