Chapter 7 bankruptcy can be used by debtor corporations, partnerships, limited liability companies, and certain other types of organizations to liquidate the assets of the company and distribute any proceeds to creditors. In essence, Chapter 7 bankruptcy is used to permanently wind-down the assets of a distressed company or to sell all, or substantially all, of the corporate assets. It should be noted that businesses in Chapter 7 do not receive a discharge at the end of the bankruptcy case, but rather merely become judgment proof at the end of the case, unlike real people in an individual Chapter 7 proceeding. This means that a Chapter 7 debtor company cannot go back into business immediately after the conclusion of the bankruptcy case if it obtains new assets, as creditors can target these assets until the expiration of any statute of limitations period on the claims.

Chapter 7 bankruptcy is an appropriate solution to permanently end the operations of a distressed business. Chapter 7 is not an appropriate solution where the board or officers decide that the business should be operated for an extended period of time to achieve maximum monetization of business assets for creditors. If continued operations are essential to maintaining the value of the business assets, then a Chapter 11 bankruptcy filing or a General Assignment for the Benefit of Creditors are the more appropriate contexts to resolve the distressed financial situation of the business.

When a Chapter 7 corporate bankruptcy case is filed by the debtor, a Chapter 7 trustee is appointed by the court to liquidate the debtor company. The court-appointed trustee may, but need not, hire any professionals or employees of the company to wind-down the debtor’s business. While Chapter 7 bankruptcy trustees generally are familiar with winding down company operations, they are not always experts in the particular aspects of the debtor’s business. This frequent lack of expertise relevant to the business of the specific debtor can lead to inefficiency in the administration of the debtor’s assets and difficulty liquidating the estate within a time frame that provides maximal monetization of a debtor’s assets for creditors. Consequently, where the best monetization of the debtor’s business can be obtained by a trustee with specific expertise in the debtor’s industry, Nova Law Group recommends considering a General Assignment for the Benefit of Creditors, where the debtor selects the assignee (role of trustee) itself.