Businesses often fail, especially startups. California entrepreneurs that find their business dreams falling short could avoid feeling discouraged by keeping options open for starting over. Chapter 7 liquidation bankruptcy might not appear like a “bright event,” but it does offer a business owner a potential way out of a bad financial situation.
Chapter 7 for the business owner
Sometimes, a business faces unavoidable doom. The company runs into massive debts, likely from a combination of excessive spending and borrowing with too little revenue generated. Chapter 7 makes it possible to liquidate assets to pay down debts, along with the courts freeing the business owner from unsecured debt obligations if he or she is a sole proprietor.
Liquidation serves as an alternative to bankruptcy filings that restructure debt. While setting up payment plans and following through may seem like a noble idea, compliance may prove impossible. When a business hits a rock-bottom point with no viable path forward, liquidation bankruptcy may be the only way out.
Turning the process over to a trustee
Upon entering Chapter 7 liquidation bankruptcy, the court appoints a trustee to oversee the process. The trustee pays prioritized creditors after taking hold of the various assets. Once everyone ends up paid, the debtor is no longer responsible for any dischargeable debt. However, under business bankruptcy rules, corporations and business partnership entities may not receive a discharge. Again, only sole proprietors do.
Not every sole proprietor is eligible for Chapter 7 bankruptcy, either. Passing a means test becomes necessary to qualify. Those who do not pass the means test might seek reorganization bankruptcy protection.