2987 Clairmont Road, Suite 350 | Atlanta, Georgia 30329

Chapter 7 Bankruptcy for Small Businesses

Amid the COVID-19 pandemic and the resulting lockdowns and restrictions, many small businesses across the country have drastically downsized their operations. Although some may struggle on, perhaps filing for Chapter 11 under the Small Business Reorganization Act, others may see more benefit in cutting losses by shutting down. But a problem remains: how to deal with existing debt. For some small businesses, Chapter 7 bankruptcy may be the best option. 

In a Chapter 7, a trustee is appointed to sell off all non-exempt assets of the business to pay off creditors as much as possible. After completion of that process, known as liquidation, the remaining outstanding debt of the business is generally discharged. However, the extent and method of discharge will differ based on the small business’s structure — namely, whether it is a corporation, limited liability company (LLC), partnership or sole proprietorship.

In a corporation or an LLC, the shareholders are shielded from personal liability, except to the extent they have signed as guarantors of corporate obligations. If, once the trustee sells the corporation’s non-exempt assets to pay creditors, the sales proceeds do not wipe out all the debt, the creditors can sue the corporation outside the bankruptcy for the remaining debt. However, since the corporation is then devoid of assets, the debts are uncollectible in practical terms.

Partnerships rarely file for Chapter 7, since they are not legal entities. Their general partners — those who are personally liable for the partnership’s debt — need to file individually for bankruptcy protection. Most partnership agreements state that if any general partner files for bankruptcy, the partnership automatically dissolves. Limited partners remain liable for debt to the extent of their ownership shares.

For a sole proprietor, Chapter 7 means filing for personal bankruptcy, since the business is not a separate legal entity. This means that the bankruptcy case will discharge business debts as well as personal debts. An important aspect of a business owner’s Chapter 7 is that if the owner’s business debt is greater than his or her personal debt, the means test does not apply. As a result, there is no requirement of demonstrating an inability to repay creditors. If the proceeds from the sale of the business assets do not satisfy all the creditors’ claims, some of the owner’s personal assets may be subject to liquidation. However, the exemptions provided by state or federal law are usually sufficient to protect this property. 

At Rountree Leitman & Klein LLC in Atlanta, we counsel business debtors on the relative advantages of Chapter 7 and alternative methods of relief from financial difficulties. During the COVID-19 pandemic, we are accessible via telephone, video conferencing, email, and in-person meetings by appointment. Call us at 404-737-9623 or contact us online to arrange a consultation. 

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    Atlanta, Georgia 30329

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