Can an Operator of an LLC Get a Discharge in a Bankruptcy?

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A small-business owner forms an LLC when he wants to limit his liability for business debts. If the LLC cannot pay its debts, the LLC’s creditors cannot go after the operator’s personal assets to satisfy the debts. The LLC may seek help from the federal government by filing for bankruptcy. Under Chapter 7 bankruptcy, an LLC may not receive a discharge, but the operator of an LLC may receive a discharge under certain circumstances.

Chapter 7 Bankruptcy

An individual files for Chapter 7 bankruptcy seeking a fresh start. The bankruptcy court grants the individual a new start by wiping out the individual’s debts and allowing the individual to continue business as usual. This does not happen when an LLC files for Chapter 7 bankruptcy. After filing for Chapter 7, there will be no business as usual, nor will the LLC gain a fresh start. If an LLC wants to continue operating, it should file for the reorganization chapter of bankruptcy, Chapter 11.

LLC and Chapter 7

Once the LLC files for Chapter 7 bankruptcy, the LLC will cease to exist, but the LLC‘s creditors will still receive payment. A bankruptcy trustee will assess the assets that the LLC owns. She will then sell the assets and pay the LLC’s creditors according to priority. If the trustee does not make enough money from the sale of the assets to pay all of the creditors, the creditors cannot seek payment from the LLC operator unless the operator guaranteed that he would pay the LLC’s debts if the LLC, itself, could not pay them.

Operator and Chapter 7

Even though an LLC cannot receive a discharge under Chapter 7 bankruptcy, if the operator of the LLC personally guaranteed some of the debts of the business, he could receive a discharge under Chapter 7 bankruptcy. The operator of the LLC must first file a bankruptcy petition, and his money problems will halt almost instantaneously when the automatic stay goes into place. The automatic stay prevents the operator’s creditors from trying to collect on debts. The bankruptcy court will appoint a bankruptcy trustee to deal with the operator’s creditors.


If the LLC operator owns any property that the trustee can sell to pay back the operator’s creditors, the bankruptcy trustee will sell that property. If the operator does not own any property that the trustee can sell, the trustee will report back to the bankruptcy court that the case is a no-asset case. Whether the operator did or did not have assets to sell, has no bearing on whether the bankruptcy court will grant the operator a discharge. According to U.S. Courts, the federal bankruptcy court grants a discharge to 99 percent of the people who file a Chapter 7 bankruptcy petition; therefore, the operator of the LLC will more than likely receive a discharge of his debts.


About the Author

August Jackson is a contributor to various websites. She has taken courses in copywriting and has worked in corporate America as a proofreader. Jackson holds a Bachelor of Arts in English and a Juris Doctor with an emphasis in bankruptcy law.

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