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How a Chapter 7 bankruptcy can help a struggling business owner

On Behalf of | Apr 11, 2024 | Bankruptcy

Businesses don’t always thrive despite the best intentions of those who own and operate companies. Even when someone has a history of business success or a great idea, factors outside of their control could affect an organization. Entrepreneurs and business owners sometimes reach the uncomfortable realization that their business is insolvent and about to fail. Those who have decided to end or dissolve a business organization sometimes choose to file a Chapter 7 bankruptcy as part of that process.

Although bankruptcy can be a powerful tool for those trying to protect a business, it can also be useful for those who need to close down a business. Why do so many those who run struggling businesses choose to pursue Chapter 7 bankruptcy?

To avoid personal liability

When a business fails, creditors, frustrated workers and consumers filing lawsuits against the company may still want compensation. In some cases, those parties can convince the courts to pierce the corporate veil. Doing so may allow them to hold a business owner personally responsible for company debts if there has been some kind of financial misconduct or mistakes when managing business resources. Business owners who take the time to discharge company debts prior to closing down the company protect themselves from scenarios in which creditors or lawsuit plaintiffs try to hold them personally accountable for organizational obligations.

To create a clean slate

Moving on from a failed business venture can be a lengthy process. It requires not just financial planning and career development but also emotional healing. Receiving collection notices or losing out on new opportunities because of prior business debts could drag someone back down into a negative place. Those who take the time to fully resolve business financial obligations with a timely Chapter 7 bankruptcy can eliminate organizational debts and provide themselves with the clean slate they need to bounce back from the company’s failure.

A successful Chapter 7 business bankruptcy can prevent aggressive collection activity in the final days of a company’s operations and may help executives and owners move on to new employment or projects with fewer risks. Those who understand the risks inherent in closing down a struggling business may see the value in a business bankruptcy filing during a company’s final days of business operations.