Many clients contact me to discuss their failing businesses, wondering if they should file a “Chapter 11”.  

What most small business owners do not understand is that a Chapter 11 Bankruptcy is not a dissolution of their business. 

A Chapter 11 Bankruptcy is only effective for those businesses that are continuing to generate revenue, but are being hobbled by creditors taking judgments against them, restraining bank accounts, merchant credit card accounts or proceeding with evictions.  In that case, a Chapter 11 Bankruptcy will restrain the creditors long enough so that your client can use his revenue to reorganize his business and stay afloat.

But what happens when a small business owner is not generating enough revenue to continue his business? 

If a small business is being shut down by its creditors, and is not generating between $200,000 and $1,000,000 in revenue (depending on the business), then it may be time to walk away from the business, and not try to reorganize through a Chapter 11 Bankruptcy.

Is it necessary to file a Bankruptcy case when dissolving a business? 

No.  In most cases a corporation can simply close its doors and walk away from its debt.  If the corporation has no assets or inventory, then it is effectively “judgment-proof”, which means that creditors who hold judgments will not be able to collect anything, since no bank accounts or inventory exist. 

 The corporation merely winds up its business according to the Business Corporation Law, files a final tax return, files a certificate of dissolution with the Secretary of State, and stops operating.   A corporate bankruptcy is not necessary.

Corporate liability vs. personal liability.

However, if your client is a sole proprietorship, then he is personally liable on all the business debt. 

Also, even though a small business owner has formed a corporation, he must still examine his debts to determine whether personal liability may remain on the business debt.