Companies are still “on the hook” even after filing chapter 7

Posted by on Jul 30, 2013 in News | No Comments
Companies are still “on the hook” even after filing chapter 7

When pursued by creditors, corporations and limited liability companies often threaten to “wipe out” obligations by filing chapter 7 bankruptcy.  Creditors should be aware that corporations, limited liability companies, and partnerships cannot discharge debts via chapter 7 bankruptcy.  When an entity files chapter 7, §362 of the Bankruptcy Code imposes an “automatic stay” which temporarily prohibits creditors from taking collection steps.  A chapter 7 trustee will immediately be appointed, tasked with identifying and liquidating as many of the entity’s assets as possible, for distribution to creditors.  When the trustee has finished administering the estate, the bankruptcy case will be closed.  At that point, the automatic stay terminates and creditors may immediately reinitiate their collection efforts, as if the bankruptcy case never happened.  By the time the entity’s bankruptcy case is complete, the trustee may have liquidated all of the entity’s assets, leaving the entity with nothing of value post-bankruptcy, in which case creditors’ collection efforts may not be fruitful.  However, in some cases, collection steps are worth pursuing post-bankruptcy because either: (a) the trustee did not identify valuable assets during the bankruptcy case, or (b) the entity acquired assets after the date of the bankruptcy filing.  When negotiating with entities pre-bankruptcy and attempting to collect post-bankruptcy, creditors should be aware that corporations, limited liability companies, and partnerships cannot discharge debts via chapter 7  bankruptcy.