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How Does Corporate Chapter 7 Bankruptcy and Liquidation Work?

Robert J. Adams & Associates July 22, 2020

When it becomes apparent that the business just cannot go forward, the filing of a Chapter 7 may be the best option to orderly close the affairs of the business.

When a Chapter 7 is filed the business shuts down and its assets, if any, will be liquidated. At the conclusion of the case there is no discharge; the case is merely closed. Also, the exact name of the corporation may never be used again.

There must be preparation before the case is filed.

Upon the filing of a Chapter 7 the United States Trustee appoints an “Interim Trustee” (generally called the Chapter 7 trustee) who oversees the case from start to finish. The Chapter 7 trustee is given the responsibility of selling assets that will result in payments to creditors.

There are multiple schedules that have to be completed. Among the schedules to be included are a list of debts and all assets.

Essentially the company must have a balance sheet that is converted to the schedules. When practical the services of an accountant should be used. Inventory and assets should be itemized.

All debts should be listed and categorized as Secured, Priority and General Unsecured Debts, as follows:

  1. Secured debts are debts where property has been pledged as collateral. This can be a car or truck that has been financed or perhaps restaurant equipment that has been financed. The schedules must list the estimated value of the assets secured by the liens;

  2. Priority Debts have been given a higher status by law that has to be paid in full. These debts include payroll taxes; recent income tax debts; and sales taxes; and, unpaid wages due within 180 days of the filing.

  3. Unsecured debts are debts with no liens-such as credit cards and unexpired leases.

  4. If there are debts to “insiders” or debts that have been personally guaranteed the debt schedules must so indicate.


  1. Businesses that have financial problems frequently defer the payment of Payroll Taxes, Unemployment Insurance, and Sales taxes. After the closing of a Corporate Bankruptcy, balances due to Payroll taxes and the like will be levied against the officers and directors.

  2. Small corporations generally have trouble obtaining credit. Creditors frequently require the personal guarantee of the principals of the business. After the corporation has been liquidated creditors will likely pursue the principals of the business for any outstanding balances. Also, the Automatic Stay does not extend to co-debtors.

  3. If the principals have “commingled” the business’s funds creditors (including the trustee) may attempt to “Pierce the Corporate Veil.” If principals of the company have used corporate funds to pay personal bills and/or buy things for themselves (like a TV for home) or even going on vacation that are not business related there may be an attempt to pierce the corporate veil. If successful the creditor and/or the trustee will seek to hold the principals liable for the debts in total or in part.

The principals completing the schedules and testifying at the trustee meeting and/or court appearance must be honest and forthcoming. Everything is signed and testified under oath. A lack of honesty can result in severe penalties.

Corporate Chapter 7 can only be filed with a licensed lawyer as its Attorney of Record. The law office of Robert J. Adams & Associates have helped business wind down their business and aided in avoided certain pitfalls that could have affected the owners. The court’s filing fees is only $355 and generally speaking attorney’s fees are a one-time charge and very reasonable.

For more information on Corporate Chapter 7 Bankruptcy, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling today.