Going Out of Business: Liquidate Assets Yourself or File for Bankruptcy?

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If you've run up big business debts and are worried you'll never being able to repay them, it may be time to sell the business's assets, pay off its debts as best you can, and move on. There are three main ways to proceed:

  • Sell your assets and negotiate with your creditors and agree on a settlement that releases you from further liability (a work out).
  • Hire a company or law firm that specializes in this process to do it for you (an assignment for the benefit of creditors).
  • File for bankruptcy and let the court sell your assets and wipe out remaining debt.

While bankruptcy is a powerful tool—it can wipe out most unsecured debts like credit card bills, lawsuit judgments, and debts to suppliers and give you a fresh start—if one of the alternative solutions fits your situation, it will probably be less expensive, less time-consuming, and less gut-wrenching than a bankruptcy filing. Which liquidation option works best for you depends on the size of your business, the amount of your debts (business and personal), and the type of business you operate.

Sole Proprietors

If the value of your business assets is almost enough to pay your debts, you might just be able to sell your assets and settle your debts yourself, without bankruptcy, by doing a work out—a process that's cheaper and less public than bankruptcy. 

If you have a lot of debt but your creditors won't take your settlement offers -- or you don't even have enough cash to offer a settlement -- bankruptcy is likely your best option. All business debts are personal when your business is organized as a sole proprietorship, so your bankruptcy choices are to file for Chapter 7 bankruptcy, which will wipe out most of your debts, or for Chapter 13 bankruptcy, which will let you repay some or all of your debts over time.

Sole proprietors generally don't make assignments for the benefit of creditors because an assignment doesn't offer a discharge of debts like Chapter 7 bankruptcy does.

Corporations and LLCs

If your business is a corporation or LLC, your decision will depend primarily on whether or not you are personally liable for any of the business debts.

Generally, you don't need to file for personal bankruptcy to escape most business debts, because you are not personally liable for them. The corporation or LLC, as a separate legal entity, is liable. But if your business can't pay all of its debts, you'll want to negotiate a settlement with your creditors, assign your debts to an ABC company, or file a business Chapter 7 bankruptcy. If you go the ABC or bankruptcy route, someone else (the bankruptcy trustee) will handle the orderly liquidation of business assets and payment of debts. Whatever business debts can't be paid will be wiped out at the end of the bankruptcy case.

If, however, you personally guaranteed business debts and want to wipe out those debts, you'll need to file for personal Chapter 7 bankruptcy. (You can file both a business bankruptcy for business debts and a personal bankruptcy for your individual debts.) For example, if you rented a space for your business and the landlord insisted that you personally guarantee the lease, then you are on the hook for back rent if there aren't enough business assets to pay it. If you file for personal Chapter 7 bankruptcy, you can get that debt discharged.

Partnerships

When you're a partner, you're personally liable for business debts—so in almost all cases, you'll need to file for Chapter 7 personal bankruptcy to wipe out those debts. Of course, you can try to negotiate a deal with your creditors on your own or assign your debts to an ABC company or law firm, but both of these tactics are more complicated when other partners are partially responsible for the debts.

Partnerships rarely file for Chapter 7 business bankruptcy because it doesn't rid the partners of their personal liability for any of the business's debts. In fact, it actually makes it easier for creditors to reach the partners' personal assets, because a bankruptcy trustee in a Chapter 7 bankruptcy case can sue the partners personally to recover some cash to pay the partnership's debts.

What's the Best Liquidation Strategy for You?

Generally, most business owners with a large debt burden opt for bankruptcy rather than doing their own work out (because it's easier) or an assignment of assets and liabilities (because they don't know about this option). And most small business owners who file bankruptcy file an individual Chapter 7 bankruptcy to get rid of large personally guaranteed business debts, rather than a business bankruptcy. Here are some of the pros and cons of each alternative.

Ways to Liquidate Business Assets and Settle Debts
Do a work out yoursef Hire a "ABC" company or law firm File for personal Chapter 7 bankruptcy File for business Chapter 7 bankruptcy

Private process

Assets likely to bring more than if sold by bankruptcy court

You choose which debts get paid first, and how much each creditor gets

If you've made payments to family or friends, those payments won't be taken back as they would in bankruptcy

Cheapest alternative

Private process

Assets likely to bring more than if sold by bankruptcy court

Lets you turn negotiations over to professional and move on with your life

If you've made payments to family or friends, those payments won't be taken back as they would in bankruptcy

Public process

Lets you wipe out personal obligations, including those for business debts

Assets sold in bankruptcy always fetch a low price

You may lose personal assets

Bankruptcy trustee controls how much each creditor gets

If you've made payments to family or friends, the bankruptcy trustee will demand that the money be returned and given to other creditors

Bankruptcy goes on your credit record for ten years

 

Public process

Available only to LLCs, corporations, and partnerships

Doesn't erase personal liability for business debts


Assets sold in bankruptcy always fetch a low price

Bankruptcy trustee controls how much each creditor gets

If you've made payments to family or friends, the bankruptcy trustee will demand that the money be returned and given to other creditors

Won't affect your personal credit record



Next Steps

To learn more about each of these alternatives, see Nolo's articles on each option:

 Consult a lawyer for advice. After you've learned about your options, look for a lawyer who will quote you a reasonable fee to review your business and personal affairs and advise you on how to proceed in your particular situation. Connect with a local bankruptcy lawyer.

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