Why File a Chapter 7 Business Bankruptcy?

Corporations and LLC’s don’t get a discharge in a Chapter 7 bankruptcy, so what’s the point of filing? Ensuring that business assets go to pay payroll, benefits, and taxes is a compelling reason.

Chapter 7 is a liquidation proceeding; the trustee appointed by the court will gather up and sell the corporation’s assets and pay creditors in the order of their priority under the Bankruptcy Code.

It is the notion of priority, then, that may make it advantageous for a corporation going out of business to file bankruptcy. The Code’s priority scheme provides that claims with a higher priority are paid in full before claims with a lower priority get anything.

The business owner probably has two personal concerns about what happens to the business assets: they want to receive payment in their role as employee, and to see that taxes for which the individual owners might be liable personally get paid from corporate assets to the extent possible.

The owner’s concerns dovetail nicely with the priority scheme: unpaid wages incurred in the 180 days before filing or cessation of the business, whichever came first, have a priority for payment. Claims are capped at $10,000 per employee.

Taxes owed to governmental agencies have a high priority for payment in bankruptcy. While the shareholder probably isn’t liable for the corporation’s income tax or property tax, the individual owners may well be liable for any unpaid trust fund taxes (employment taxes) or for unpaid sales tax. The owner shareholder has a real interest in payment of these taxes before payment of run of the mill business debts.

So, one very good reason for a business corporation to file a Chapter 7 bankruptcy is to see that priority claims are paid, instead of the claim of a unsecured creditors without a priority who may file a proof of claim or a collection action.