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James R. Jones, Attorney at Law.

Why Would A Corporation Or LLC File A Chapter 7 Bankruptcy?

A corporation or an LLC can certainly file a Chapter 7 Bankruptcy. I’ve had a couple of Chapter 7 bankruptcies involving LLCs and corporations. In the case of the electrical contractor, if they are involved in litigation and some statute or theory of law, they would be liable in addition to the LLC. It would be appropriate to file for the LLC. In another case, an individual sued another for $300,000. The suing party sued the business owner personally and the LLC. The plaintiff was trying to recover part of the business records showing where all the money went. If we can’t get it resolved, we will file for the entity and the individual. Otherwise, we’ll just file for the individual. They can still keep that lawsuit going and have the defendant jump through all kinds of hoops, produce records, and appear for depositions. In this case, the best thing to do is to terminate the litigation. That could only happen if the entity has assets that are strictly corporate assets.

If I Am Liable For A Personal Guarantee, Is Filing A Chapter 7 Bankruptcy The Right Move For Me?

If you are liable for a person guarantee, filing for Chapter 7 is a viable option. Personal guarantees are dischargeable in bankruptcy, even on SBA loans made to the business since they are individually guaranteed by the debtor.

Would My Spouse Be Liable For My Business Debts In Bankruptcy If I File?

In some cases, a spouse may be liable for business debt if the other spouse files for bankruptcy. Texas is a community property state, which means that everybody is liable for 50%. Typically, if both spouses sign guarantees on all the debt, then both are held liable. Otherwise, if one of the spouses didn’t sign anything, he or she wouldn’t be liable for the other spouse’s business debts. I try to keep the wife or husband out of it unless they’re both being sued or being held liable for a business guarantee or some other kind of security instrument.

What Is The Chapter 7 Bankruptcy Process For A Small Business?

In a Chapter 7 bankruptcy, I normally have clients go to annualcreditreport.com to get copies of their credit reports. I enter all that information into their schedules plus any other debt they may have, like a ground lease or an equipment lease. Once all of the assets and debt are entered into the case, we go over it in detail and make sure we didn’t miss anything. The cases are then filed electronically in the federal court in Houston. Within a couple of minutes, I get back a file stamped copy from the court with the file date and case number. Once that is filed, that immediately stops all collection efforts by any creditor, including the IRS. There is an automatic stay under Section 362 of the Bankruptcy Code that enjoins any collection effort from anybody. Creditors cannot send you a bill, call you, or take any money. It is a great relief to the debtor.

Within a few days, after it is filed, I will get a notice asking to appear at the first meeting of creditors. They call it the first meeting of creditors, but no creditors ever show up. All the Chapter 7s are issued in the Southern District of Texas are presumptively no-asset cases. In other words, there is nothing available to pay the creditors when the court informs or when the notice goes out. Attached to the petition is a schedule. The typical filing is 65 to 80 pages, which includes a mailing list of all the creditors. The creditors that are identified on your schedules are sent a copy or notice that a bankruptcy has been filed. They will also get notice of the first meeting of creditors, which at this point is being conducted telephonically. Depending on the trustee, they will have had a chance to look at the filing, the bank statements for the last two years, and/or the bank statements for the past three to six months.

Most trustees only want three months. Even though there is one now that requires six. The meetings typically last 15 minutes. The first question is: “why are you filing bankruptcy?” From there, they go through a canned list of questions: Have you listed all your assets and liabilities? Has your attorney explained to you if it’s a Chapter 7, Chapter 13, or Chapter 11? Do you anticipate any increase in your income? At the end of the meeting, the trustee will say that they are concluding the meeting. That’s a signal to the bankruptcy judge, who you will never meet in most cases, to issue an order of discharge closing your case 60 days from the date of the 341 meeting.

Once we attend the meeting of creditors and a trustee has signed off, we’re just waiting for the 60 days to get your order of discharge or the order closing the case. Once the order is received, it is over. Typically, a bankruptcy lasts between 60 to 90 days. The meeting of creditors occurs around 30 days after we file, and then it is 60 days for the waiting period. The waiting period allows any creditor to object to the discharge, which is pretty rare in a Chapter 7. Now, it does happen in business Chapter 7s. I had two last year.

A swimming pool company had over $920,000 in unsecured debt and a lot of secured credit that financed a piece of equipment that was lost or stolen. The creditors were not satisfied with my client’s explanation of what happened to the equipment. As a result, they filed an adversary seeking to avoid the discharge, which is pretty rare. However, we were able to settle it. I’m not sure what the motivation was, but my client wanted to settle it. And so, they got paid and it’s all over.

In another case, a client who was in financial difficulty before the lawsuit hit had borrowed $20,000 from her mother to pay their creditors. The payment was remitted within 90 days before the filing of the bankruptcy. Consequently, the trustee brought an adversary to avoid that as a preference. You can’t prefer one unsecured creditor over another. For instance, you can’t pay American Express and not Visa. When that happens, the trustee will call that money back. You will then have to refund it to the trustee, who will use it to pay your creditors. That’s exactly what happened. We were well within the 90-day period. There is no defense to that. Thus, we recently settled it. The debt was for $22,000 and it was settled for $12,750, but this is rare. It is rare because Chapter 7s are presumptively no asset cases. Nothing like that ever comes up unless there is some unusual circumstance.

For more information on Chapter 7 Business Bankruptcy In Texas, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (713) 263-3888 today.

James R. Jones, Attorney at Law

Call Us Now To Get Started
(713) 263-3888