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Why do people file for bankruptcy when their business closes?

| Jun 11, 2021 | Chapter 7 |

When many people start a business, they don’t want to have personal liability for the company’s debts or lawsuits. An LLC or corporation prevents creditors or those injured by defective products from bringing claims against you, your assets or your future income.

Given that there is already a degree of separation between you as an individual and your business, you may have very few concerns about what your business’s closure will mean for you personally. Filing for bankruptcy for the business may seem unnecessary when the company no longer has assets or revenue for others to make a claim against.

However, there is actually a very good reason why business owners often file for Chapter 7 bankruptcy when they close their company.

Bankruptcy ensures you won’t face future claims from creditors

Even after you dissolve the business, people could still continue to bring legal or financial claims against the company. As the owner of the company, you could eventually become liable for those claims in certain circumstances.

Although it may mean a little bit more paperwork and expense now, filing Chapter 7 bankruptcy when you know you want to close your business will help protect you from those future financial claims. You identify and alert your creditors about the business’s closure and bankruptcy filing. You liquidate assets to repay creditors if possible, and then the court discharged your debt.

Instead of assuming that no one can come after you for business debts in the future, you can ensure that those debts are no longer actionable if you successfully file Chapter 7 bankruptcy on behalf of the business.