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The Risks of Filing a Chapter 7 Bankruptcy for Your Company: Part 3 – Consider Liquidating Outside of Bankruptcy

Click here to read Part 1 and Part 2

This is the last of a three-part series covering the risks of filing a Chapter 7 bankruptcy petition for a business entity.  Please visit here to read parts one and two. If your business is unable to pay its debts as they come due, you would be prudent to seek the advice of bankruptcy counsel.  Bankruptcy counsel may recommend that you file a Chapter 7 bankruptcy for the company. Filing a Chapter 7 bankruptcy for a defunct business provides an orderly and transparent process for liquidating the company’s assets and distributing the funds to creditors under the supervision of the Bankruptcy Court. 


In parts one and two of this series, I discussed the risks of trustee litigation and the possible tax liability of equity holders in a Chapter 7 bankruptcy filing by a business entity. In this part three, I will cover some of the reasons why you might elect to manage the wind down of operations and liquidation of the company yourself, with the guidance of bankruptcy counsel, outside of the bankruptcy process. To begin with, managing the liquidation of your company out of bankruptcy avoids the risk of trustee litigation that I described in part one.  In addition, the risk that the equity holders will incur tax liability for income generated by the liquidation is generally more manageable outside of bankruptcy. Liquidating the company’s assets out of bankruptcy also avoids the cost of the trustee’s professionals and the trustee’s compensation that would be paid “off the top” from the sale proceeds of the assets.


A trustee is most likely not going to have a high degree of knowledge or familiarity with your company’s industry, or know the likely buyers of the assets. Your knowledge of your company’s industry, your competitors, and customers may provide you with a greater ability to get top dollar for the assets. You know who the likely buyers are, and you know the value of your company’s assets. Simply put: your institutional knowledge of your company’s industry and your company’s assets are considerable advantages in negotiating sales of your company’s assets. In addition, if you enjoyed a long history of positive relationships with your customers, you are probably going to be more effective at collecting outstanding receivables owed by those customers than a trustee.


There are several possible reasons why you might have a vested interest in maximizing the value of the company’s assets and generating as much money in a liquidation as is reasonably possible.  For some business owners, it is important for them to do all they can to minimize the harm of closing the doors to their employees, customers and suppliers. A more pragmatic reason might be that you personally guaranteed many of the company’s debts. If you are liable for company debts, the more money you can generate in the liquidation of assets to pay those debts, the less exposure you will have on those debts personally. In addition, if there is a bank loan secured by the company’s assets, you and your bankruptcy counsel may be able to negotiate a forbearance agreement where you control the liquidation of the business under the bank’s close supervision, with debt forgiveness if you achieve certain benchmarks in dollars collected in the liquidation of the company’s assets.



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