What Happens When an LLC Goes Bankrupt?

When a limited liability company (LLC) goes bankrupt, the LLC may seek temporary relief from its creditors while reorganizing, or the firm may declare itself insolvent and cease operations immediately. The LLC's bankruptcy normally has no impact on the credit of its officers.

Function

If an LLC is unable to meet its debt obligations or is otherwise out of operating capital, bankruptcy may be the only choice. Bankruptcy for an LLC includes protection from creditors.

Benefits

Some LLCs are able to successfully reorganize in bankruptcy by settling their debts with lenders. Other LLCs liquidate assets and stop operations.

Types

There are two types of bankruptcy that an LLC may enter: Chapter 11 reorganization, in which an LLC restructures; or Chapter 7 bankruptcy, in which the LLC liquidates and stops operations.

Considerations

Bankruptcy can harm an LLC's credit rating, which can make it difficult to get future loans in the business name, assuming the LLC remains in operation.

Warning

Make sure that you or another officer of the LLC have not personally guaranteed debts. If this is the case, your personal credit may be connected to the business loans.

References

• Bankrate: LLC Bankruptcy
• SEC: Corporate Bankruptcy