J Thomas Black
Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization

Quite a few people that are business-owners come into our Houston, Texas bankruptcy law office, wanting to file a bankruptcy for their small business that has failed or is failing. Often the business is an LLC or corporation with few if any assets.

In such a case, it may not be necessary for the LLC or corporation to file bankruptcy. If a Texas LLC or corporation has no assets, and it is going to go out of business, filing chapter 7 bankruptcy is actually frowned upon by the bankruptcy courts. The reason is that an "entity" like an LLC or corporation does not receive a discharge or cancellation of debts in a chapter 7 bankruptcy. 

And if there are no fixtures, furniture, equipment, substantial bank accounts, accounts receivable, or other assets or property for a chapter 7 trustee to liquidate and sell and pay the creditors, then there is really no reason to file a chapter 7 bankruptcy for the corporation or LLC itself.

It is different for the individual owners of the business. They are often on the hook for "personal guarantees" of the corporate debt. Or they have borrowed money in their own name to finance the business, on credit cards, personal loans or some other way. The individual owners of the business CAN get a discharge of their debts, so that is generally what is done. There is a personal chapter 7 bankruptcy filed for the owners of the LLC or corporation, and the LLC or corporation is later terminated. 

If your business is having problems but it is viable, it may be possible to reorganize it by filing chapter 11 bankruptcy. Corporations and LLC's can receive a discharge of debts in a chapter 11 bankruptcy. But they must propose a reorganization plan and have it approved by the bankruptcy court, usually with the cooperation of the creditors, who can vote on the plan.

That being said it is possible to discharge a large amount of unsecured debt in chapter 11 cases, because if a reorganization is unsuccessful and the case is converted to chapter 7, the unsecured creditors will likely receive little or nothing. They know that so it is common that they vote to approve a chapter 11 plan where they will get a "haircut" but they will at least receive something.

There are many other considerations in deciding how to handle a small business that is failing or has failed. If you have more questions, call our office at 713-772-8037 and make an appointment with one of our attorneys to discuss your options. Your first consultation with us is complimentary.

Do you have any questions or comments about small business bankruptcy? Please leave your comments or questions below!

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