Only individuals are entitled to a chapter 7 discharge. Bankruptcy Code § 727(a)(1). Accordingly, the goal of a voluntary business chapter 7 debtor can’t be to receive a discharge.
Instead, a corporation, limited liability company, partnership or unincorporated business association might choose to file a chapter 7 case to, e.g., induce a chapter 7 trustee to litigate to recover assets that were transferred in a manner that appears avoidable under bankruptcy law or applicable state law. That recovery and distribution to creditors may have the beneficial effect of reducing third party liability on those debts. Also, unsophisticated creditors may be put off by the chapter 7 filing and defer or decide not to pursue collection from the owners of the defunct company under administration by the chapter 7 trustee.
More often, business chapter 7 cases are the result of failed chapter 11 reorganization cases. If a chapter 11 debtor is unable to confirm a plan of reorganization within a reasonable time, a party in interest such as the Office of the United States Trustee (the division of the United States Justice Department responsible for oversight of the bankruptcy laws) (the “U.S. Trustee”) or a creditor actively participating in the case may file a motion to dismiss the case, or to convert the case to chapter 7. While many such cases are dismissed, conversion becomes more likely if there are (or could be) significant asset values in excess of non-avoidable liens.
Michael D. Pinsky, P.C. represents clients throughout New York’s Hudson Valley in a full range of bankruptcy matters. Please call 845-394-2616 or contact me online for a free initial consultation at my office in Newburgh.