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Bankruptcy is something business owners seek to avoid, but unfortunately it is also something that becomes a reality for some businesses. Should such a situation arise, there are different options for bankruptcy filings, with Chapter 7 (liquidation) and Chapter 11 (reorganization) being the most common forms of business bankruptcy.

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Bankruptcy is something business owners seek to avoid, but unfortunately it is also something that becomes a reality for some businesses. Should such a situation arise, there are different options for bankruptcy filings, with Chapter 7 (liquidation) and Chapter 11 (reorganization) being the most common forms of business bankruptcy. To help with the decision on which type of bankruptcy to file, here are the top reasons for a business to file Chapter 7.

1. Automatic stay of debt 

Since there is an automatic freeze put on creditors from collecting on debts, the debtor is protected from lawsuits and their associated costs, as well as from aggressive creditors claiming a large number of assets. In Chapter 7, the automatic stay is designed to ensure that the business can liquidate itself without having to worry about creditors pounding down the doors.

2. Court-appointed trustee

The management and board of directors of a company are relieved of their decision-making duties, and a court-appointed trustee steps in to oversee the bankruptcy process. This could in some cases be viewed as a drawback, but it can also be a positive for management and a board that want to move on to other things.

3. Claims deadline

Creditors are required to file claims by a certain date in order to collect on their debts; claims disputes can be resolved quickly with an expedited process. This will force creditors to cooperate with the process in order to be repaid.

4. Distribution without reorganization

Under Chapter 7, the trustee makes distributions to creditors without a reorganization plan. This allows debts to be paid off faster, and the entire process becomes quicker and less complicated as less administrative work is required before debts can be repaid.

Source: Robert Lapowsky, attorney and shareholder with the Philadelphia office of the firm of Stevens and Lee. He can be reached at Stevens & Lee, 1818 Market Street, 29th Floor, Philadelphia, PA 19103; 215-751-2866; email: rl@stevenslee.com.