Filing a Business Chapter 7 bankruptcy for your LLC means the liquidation of the LLC’s assets to pay off creditors. Filing Chapter 7 means that the company will no longer operate. What are the advantages and disadvantages of taking such a step?
Texas Bankruptcy for LLCs
LLCs are not subject to the Texas exemptions for business bankruptcy, nor do they receive a discharge for filing. All the company’s assets are liquidated and sold to cover the company’s outstanding debts and pay its creditors.
Personal Liability for Chapter 7 in LLCs
Typically, the owners of an LLC are not personally responsible for the debts of the company, and as such their personal property is safe from seizure and liquidation. There are cases when an owner may have personally cosigned for some of the loans or provided personal assets as collateral; in these cases the owner’s personal assets are fair game. Furthermore, in some cases the creditors may try to prove that the LLC is little more than a cover for the owners’ personal transactions, in an action called “piercing the corporate veil.”
How to Guard Against Personal Liability
If an owner is found personally responsible for the LLC’s debts by any of the above methods, often the best recourse is for that person to file a personal Chapter 7. Since a personal filing does discharge debts, it can result in the LLC’s debts that were applied to the owner being wiped out entirely.
What are the Disadvantages?
Filing for business bankruptcy under Chapter 7 means the end of the LLC. It cannot be sold or operated any longer, and all the assets must be sold by the bankruptcy trustee. Therefore it is obviously meant as a last resort, and used as an orderly way of settling the LLC’s debts at the company’s demise. A bankruptcy attorney will help determine the best course of action for the LLC contemplating bankruptcy.