Chapter 7 Bankruptcy for New Jersey LLCs

A Chapter 7 bankruptcy may, in some cases, be a smart option for winding down a business that is burdened by a heavy debt load.  If your business is organized as an LLC, it is important to understand the specific consequences that apply in the context of Chapter 7 bankruptcy for New Jersey LLCs.

In fact, it is important to recognize that a Chapter 7 business bankruptcy where a separate legal entity is involved is much different than a personal bankruptcy and might be better characterized as a liquidation.

An experienced bankruptcy attorney can help you understand the subtle differences between personal and business bankruptcies and the end result of either option.

Chapter 7 Bankruptcy for LLCs

When a business entity, such as a corporation or LLC, that is organized as a separate legal entity, declares bankruptcy under Chapter 7, it does not receive a discharge of indebtedness in the same manner as an individual person.  Instead, Chapter 7 bankruptcy for New Jersey LLCs is a means for the LLC to liquidate and wind down the business so that its creditors are satisfied to the extent possible and have no additional recourse against the LLC—which will no longer exist.

While it is often said that the LLC receives a discharge of indebtedness, Chapter 7 is really just a means of transferring the responsibility for liquidating the business to a bankruptcy trustee.  The result is essentially the same, in that creditors can no longer proceed against the LLC to recover debts after the conclusion of the bankruptcy case.

When Personal Liability is an Issue

Chapter 7 bankruptcy for New Jersey LLCs will not relieve the LLC members of any personal liability that they have assumed for the LLC’s debts.  If any of the LLC’s members have personally guaranteed the business debts, they may be required to file for personal bankruptcy under Chapter 7 in order for those debts to be discharged.

The personal bankruptcy will only free the member from personal liability on the debt.  If the LLC is unable to pay the debt, liquidation by selling the business assets and closing the business will be required in order to absolve the LLC of its own liability.

Action Steps After the LLC Assets are Sold

Even after all of the LLC’s assets are sold to satisfy creditors, Chapter 7 bankruptcy for New Jersey LLCs may not eliminate all future liabilities of the LLC.  This is because the state of New Jersey itself may still find that the LLC continues to exist.  This may create obligations involving:

  • Filing of any required annual reports
  • Paying taxes, and
  • Paying fees, fines and penalties assessed against the LLC

In order to formally dissolve the LLC, the LLC members must approve the dissolution.  If the LLC operating agreement does not specify a required process for dissolution, the LLC can use the default process provided by state rules.  The dissolution documents should be filed with the state—a state certification that no additional taxes are owed may also be required in some cases.  If the LLC designated a registered agent outside of the LLC itself, the LLC should notify that agent of the dissolution.

The LLC should also notify the IRS of the dissolution so that its employee identification number account can be closed.

Consulting a New Jersey Bankruptcy Attorney About Chapter 7 Bankruptcy for LLCs

An experienced bankruptcy attorney can help you understand the consequences of Chapter 7 bankruptcy for New Jersey LLCs, both at the business level and the personal level.  A New Jersey attorney can explain the nuances of filing for a Chapter 7 business bankruptcy so that you know your rights and understand the obligations of the entity and the individual LLC members during and after bankruptcy.