Recent Litigation Trends Underscore Risks in Small Business Chapter 7 Filings

If you are a principal of a small business that is experiencing financial difficulty, you need to be careful about filing a Chapter 7 bankruptcy on behalf of your company. Corporations cannot receive a bankruptcy discharge and the corporate bankruptcy filing will cause a trustee to be appointed. It is common for trustees in Corporate Chapter 7's to closely scrutinize all transactions between the corporation and its principals. If the trustee believes the corporation made preferential payments or fraudulent transfers to the owners, he can sue the owners in bankruptcy court to recover the funds received. In our experience, it is rarely advisable for small businesses to be placed in Chapter 7 bankruptcy; out-of-court workouts or windups are almost always preferable. If your business is having financial trouble and you are being advised to place your business into a bankruptcy liquidation, you should speak with us first.