If your limited liability company can no longer pay its debts, Chapter 7 may be a way to wind it down in an orderly fashion. Chapter 7 for an LLC in Massachusetts works differently from an individual's case, and understanding those differences matters before you file. Our Massachusetts bankruptcy practice in Reading helps business owners throughout Middlesex and Essex Counties sort out what the company owes, what they owe personally, and which path makes sense.
Key Takeaways
- Chapter 7 is a liquidation. A trustee collects and sells the LLC's assets and distributes the proceeds to creditors; the business does not continue operating.
- Unlike an individual, an LLC does not receive a discharge in Chapter 7, and it cannot claim personal property exemptions.
- The LLC's bankruptcy does not automatically protect owners from debts they personally guaranteed or owe in their own names.
- A business entity generally must be represented by an attorney in bankruptcy court.
- Cost includes the court filing fee plus legal preparation, which depends on the complexity of the company's records.
What Is Chapter 7 Bankruptcy for a Business?
Chapter 7 is the liquidation chapter of the Bankruptcy Code. When an LLC files, a Chapter 7 trustee takes control of the company's assets, such as cash, equipment, inventory, accounts receivable and any real estate, sells what has value, and pays creditors according to the priorities set by federal law. The business stops operating as part of the process.
Chapter 7 is not the only option. A business that wants to keep operating may consider a Chapter 11 reorganization (see our page on business bankruptcy under Chapter 11), and some companies wind down outside of bankruptcy altogether. Which route fits depends on the company's assets, debts and goals.
How an LLC's Chapter 7 Differs From an Individual's
No discharge for the LLC
Individuals who file Chapter 7 usually receive a discharge that wipes out eligible debts. A business entity such as an LLC or corporation does not. The company's debts are paid from whatever the trustee recovers, and the remaining balance simply goes unpaid as the business is wound down. This is one reason it is important to look at the owners' personal exposure at the same time.
No exemptions
Massachusetts and federal bankruptcy exemptions protect certain property of individual filers, such as a homestead or a vehicle. Those exemptions are not available to an LLC, so the company's assets are generally available to the trustee for liquidation.
No means test
The Chapter 7 means test, which compares household income to the Massachusetts median, applies to individuals with primarily consumer debts. It does not apply to an LLC's own filing. It may matter, however, if an owner later considers a personal bankruptcy (see our guide to Chapter 7 bankruptcy).
An attorney is generally required
An individual may file without a lawyer, but a business entity generally cannot represent itself in federal court. An LLC's petition should be prepared and filed by counsel.
The Automatic Stay and the Chapter 7 Trustee
Filing triggers the automatic stay, which generally requires creditors to stop collection efforts against the debtor, including calls, demand letters and lawsuits. The stay protects the debtor named in the petition. When the LLC files, creditors pursuing an owner on a personal guarantee or a personal account are generally not stopped by the company's case.
A Chapter 7 trustee is appointed to review the petition and administer the case. The trustee holds a meeting of creditors (the "341 meeting") a few weeks after filing, where a representative of the LLC answers questions under oath about the company's finances and records. Accurate, organized records make this meeting and the rest of the case go more smoothly.
What Does Chapter 7 Cost for an LLC?
The cost of a business Chapter 7 has two main parts:
- The court filing fee. The bankruptcy court charges a filing fee set by federal rule; check the current amount on the U.S. Bankruptcy Court for the District of Massachusetts website. Fee waivers and installment payments are designed for individual filers, so an LLC should plan to pay the fee when it files.
- Legal preparation. Preparing the petition and schedules, gathering records, and attending the 341 meeting take time. A company with many creditors, significant assets, leases, or incomplete records will usually require more work than a simple case.
Our firm offers a free consultation and handles bankruptcy work on a flat-fee basis, so you know the cost of legal preparation before you commit.
Records to gather
- Business bank statements and recent tax returns
- A list of creditors with account numbers and balances
- Loan documents, leases and any personal guarantees
- Equipment, inventory and receivables lists
- Collection letters, lawsuits and court papers
Can LLC Owners Be Personally Liable After the Company Files?
Yes, in some situations. An LLC generally shields its members from the company's debts, but that protection has limits. Owners often sign personal guarantees for business loans, credit lines, equipment leases and commercial leases. Some tax obligations can also follow responsible individuals. Those personal obligations are not resolved by the LLC's Chapter 7 case.
Before the company files, sort every obligation by the name of the borrower or account holder and note any guarantees. If an owner faces substantial personal liability, a separate individual filing under Chapter 7 or Chapter 13 may need to be considered alongside the business case. Owners should also be careful about transfers or payments made by the company before filing, since a trustee can review and, in some cases, recover them.
Talk to a Reading, MA Bankruptcy Attorney
Deciding whether to close an LLC through Chapter 7, reorganize, or wind down another way affects both the business and your personal finances. Attorney Matthew T. Desrochers has helped Massachusetts individuals and business owners with debt problems for over 25 years. Learn more about our Massachusetts bankruptcy services, contact us online, or call (781) 279-1822 to schedule a free consultation at our office at 274 Main Street, Suite 208, Reading.
Frequently Asked Questions
Can an LLC file for Chapter 7 bankruptcy in Massachusetts?
Yes. An LLC can file a Chapter 7 petition in the U.S. Bankruptcy Court for the District of Massachusetts. The case concerns the company's own assets and debts, not the owners' personal finances.
Does an LLC get a discharge in Chapter 7?
No. Only individuals receive a Chapter 7 discharge. An LLC's assets are liquidated and distributed to creditors, and the company is wound down.
Will the LLC's bankruptcy stop creditors from coming after me personally?
Generally not. The automatic stay protects the debtor that filed. If you personally guaranteed a debt or owe it in your own name, the creditor may still pursue you unless you have your own bankruptcy protection.
Does the means test apply to an LLC?
No. The means test applies to individual debtors with primarily consumer debts, not to a business entity's filing.
Can an LLC file Chapter 7 without a lawyer?
Generally no. Business entities must be represented by an attorney in federal court, including bankruptcy court.
Is Chapter 7 the only option for a struggling LLC?
No. Depending on the circumstances, a business may consider Chapter 11 reorganization, negotiating with creditors, or winding down outside of bankruptcy. A consultation can help you compare these options.
This article provides general information about Massachusetts law and is not legal advice. Reading it does not create an attorney-client relationship. Every case is different; contact an attorney about your specific situation. Attorney Advertising.