Posted on Nov 07, 2017

We have people that are business-owners come into our Houston, Texas bankruptcy law office sometimes, wanting to file a bankruptcy for their small business that has failed. Sometimes 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 not any fixtures, furniture, equipment, fat bank accounts, accounts receivable, or any 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.

Now 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 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.

Read More About Does your Texas LLC or corporation need to file bankruptcy?...

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