General

• In a Chapter 7 bankruptcy, the bankruptcy court appoints a trustee who will oversee the process of the sale of the business' or individual's assets. The trustee uses the proceeds from the sale of the assets to repay the debtor's creditors and then, if any proceeds remain after fully satisfying creditors and paying court costs, returns any remaining assets to the debtor. The trustee follows a plan devised by the bankruptcy court when selling assets and determining the order and the amount in which creditors are reimbursed.
  
  

Limited Liability Company

• An individual who has formed an LLC for his business activities has created a separate legal entity. As such, the assets and liabilities of each the individual and business are separate and distinct as well. In order to receive a discharge from both individual and business liabilities, it is necessary to file for bankruptcy protection for each legal entity.
  
  Conversely, an individual who remains a sole proprietor, a business entity that legally indistinct from the individual owner, can generally discharge all debts within a single personal Chapter 7 bankruptcy filing.
  
  

Warnings

• Since a Chapter 7 bankruptcy is a liquidation bankruptcy, filing Chapter 7 bankruptcy for an LLC results in the cessation of operations and dissolution of the LLC. Individual single-member LLC owners filing a Chapter 7 bankruptcy to discharge personal obligations may lose their ownership of the single-member LLC if the bankruptcy court determines the LLC has sufficient net assets or continuing value. Finally, single-member LLC owners who have failed to properly separate business and personal assets (as legally required) should note that courts have often seized business assets to repay personal obligations.
  
  

Alternatives

• The U.S. Bankruptcy Code allows several alternatives to Chapter 7 bankruptcy. Most commonly, businesses will seek a reorganization bankruptcy, or a bankruptcy that allows them to satisfy debts out of future earnings and then restart full operations after "emerging" from bankruptcy, under Chapter 11. Individuals are also eligible for a reorganization bankruptcy under Chapter 13.
  
  Perhaps the most common bankruptcy alternative, however, involves direct negotiation with creditors. Bankruptcy can be time-consuming and costly and many creditors are willing to negotiate favorable repayment terms in order to reduce this time and cost.