- Before a Chapter 7 bankruptcy petition will be accepted, the debtor must undergo a means test to find out whether he can complete a payment plan under Chapter 11 (for businesses) or Chapter 13 (for individuals). Individual debtors, except single-member LLCs, must complete a credit counseling program. Once the petition is accepted, the court will appoint a bankruptcy trustee to manage nonexempt property, liquidate it and distribute the proceeds to creditors in order of priority.
- Although bankruptcy is federal law, individual rules on important matters, such as what debtor property is exempt, vary somewhat from court to court. Individual debtors must file with the court that has jurisdiction over their residence. LLCs and corporations may file either in the judicial district where their principal place of business is located, or in any judicial district located in the state of their formation. Partnerships may file in the judicial district that governs their principal place of business.
- A Chapter 7 bankruptcy will discharge an individual debtor of any debts included in the bankruptcy petition. Partnerships, LLCs and corporations will not receive any discharge of debt, but will be wound up and dissolved during the proceedings. Individuals will find it more difficult to obtain credit in the future than debtors who successfully completed a Chapter 13 restructuring plan. Corporate shares and LLC interests usually become worthless, although pennies on the dollar may be paid if company assets remain after creditors are satisfied.
- Shareholders of corporations, owners of LLCs and limited partners suffer no personal liability for the debts of a bankrupt company unless they personally guaranteed company debt or committed culpable acts for which the company is held jointly liable. Sole proprietors and general partners suffer unlimited liability for the debts of their companies, although general partners may be expected to share the liability of a bankrupt partnership.
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