Chapter 7 Bankruptcy for Small Businesses

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 What Is Chapter 7 Bankruptcy?

Personal responsibility and small business Chapter 7 bankruptcies are handled differently.

Additionally, Chapter 7 bankruptcy enables debtors to wipe off most of their obligations and essentially start over debt-free. There are several disadvantages to filing for Chapter 7 bankruptcy, though, that could harm your future credit, reputation, and sense of self. The impacts of Chapter 7 bankruptcy on small enterprises are listed below.

Fill up a petition by filling out several different papers, and submit the forms to the bankruptcy court in your area to file for Chapter 7 bankruptcy. Typically, the forms ask for information about:

  • Your house
  • Your household’s monthly living costs and current income
  • Current due bills that you owe
  • Property you’ve owned
  • Financial transactions you’ve made over the last two years, and
  • Property you’ve disposed of or sold over the last two years.

The law permits you to maintain “exempt property.” Most states allow you to keep some equity in your home, clothing, home furnishings, unutilized Social Security benefits, and other needs like a car and your trade tools.

What Benefits and Drawbacks Come with Filing for Chapter 7 Bankruptcy?

Your business will close and be liquidated if you file for Chapter 7 bankruptcy. Additionally, it might end any personal obligations you have to any corporate debts. Consider the following advantages and disadvantages before deciding whether to file for Chapter 7 bankruptcy:


  • You will be released from all of your debt and obligations through bankruptcy.
  • You wouldn’t have any debt.
  • Chapter 7 bankruptcy proceedings are a brief process that doesn’t follow you for a long time.
  • Most states let creditors retain the certain property they require for their daily lives or jobs.


  • Many of the possessions you have worked so hard to acquire will be lost.
  • Your credit history and rating will be damaged for quite a long time.
  • You are not permitted to adopt another debt reduction strategy for at least another seven years.
  • Your student loan debt will not be discharged in bankruptcy (unless your case meets an exception)
  • Bankruptcy won’t let you get out of paying alimony or child support.

Do Chapter 7 Bankruptcies Protect Business Owners?

Chapter 7 bankruptcies may or may not shield the business owners, depending on how the corporate organization was created. However, each owner can declare bankruptcy under Chapter 7 to discharge their personal debt.

For sole proprietors, you might be able to eliminate your debt while still running your firm.

Business owners are typically not exempt from their personal accountability to the business debt in the case of partnerships, corporations, and limited liability companies.

How Does Filing for Chapter 7 Bankruptcy Work?

Debt collectors are prohibited from collecting debts once they have filed. This debt collection procedure has been suspended. Instead, a bankruptcy trustee is appointed, and it is their job to liquidate the company’s assets to pay off the obligations.

Do You Have to Pay Off Business Debt?

The answer mostly relies on how your company is set up and whether you have signed a personal guarantee. A personal guarantee is a promise that, if the firm cannot pay its obligation, you will. Regardless of the company structure, once you’ve signed the document, you’re responsible for the debt. In any other case, your obligation will be based on the type of business.

Sole Proprietor

If you’re a sole proprietor, your business and you are viewed as a single entity. By declaring a Chapter 7 bankruptcy in your own name, you’ll be able to discharge all eligible personal and corporate debt. You probably won’t have to worry about your income level if you have more business debt than personal debt—you won’t have to pass the Chapter 7 means test.

Using bankruptcy exemptions can allow you to protect both your personal and company assets. Therefore, you can eliminate your debts and keep running your business under Chapter 7. This works best if you operate a service-oriented firm, such as a personal trainer or accountant because most states allow you to keep a minimal amount of property—basically, the essential requirements.

Owners of businesses that demand expensive items, materials, and equipment, such as restaurants or apparel stores, may find it challenging to maintain the company after filing for Chapter 7. Any nonexempt property would be sold by the Chapter 7 trustee appointed to manage your case, making it impossible for the business to operate in many situations. If possible, the trustee might try to sell the company by themselves.


A partnership can file for Chapter 7 business bankruptcy because it is a distinct legal entity. The partnership’s business debt is not discharged when it files for bankruptcy. Additionally, the partners cannot defend their property through exemptions. The trustee will shut down and liquidate the business, selling it and all of its assets to satisfy creditors.

All partners in a general partnership are individually responsible for the company debt, which might be problematic if the partnership declares bankruptcy. The bankruptcy trustee (or the creditors) may pursue each partner’s personal assets to fulfill any unpaid obligations if there are insufficient corporate assets to cover all debts.

Most of the time, it is preferable for the individual partners to each file for Chapter 7 bankruptcy after the company closes (in their own names—not the company name) and discharge their personal and corporate debts. Remember that most partnership contracts have a provision that terminates the company if one of the partners declares bankruptcy.


A corporation can petition for Chapter 7 bankruptcy just like a partnership, but, like before, it won’t be discharged. The advantage of a business Chapter 7 is the straightforward and orderly liquidation it offers by shifting the responsibility of selling assets and paying creditors from the owners to the trustee.

However, it’s uncommon for the advantages of this kind of bankruptcy to exceed the hazards.

For example, any shareholder who personally guaranteed or cosigned a company debt will still be liable for the debt (unless the shareholder files a Chapter 7 in their own name). Most businesses would do better by negotiating a lower debt with creditors and selling the property for more money (as opposed to fire sale pricing after bankruptcy). This would relieve some of the financial pressure on people who are in charge of corporate debt.

Additionally, declaring bankruptcy provides creditors with a simple forum to assert that the executives violated corporate formalities, a process known as “piercing the corporate veil.” If this action is successful, stockholders will become accountable for the company’s debt.

Limited Liability Company (LLC)

In terms of bankruptcy and debt obligation, an LLC operates almost identically to a corporation. However, you must discharge your responsibility for commercial debts through personal bankruptcy to liquidate the business. The same dangers do as well.

Do I Require a Bankruptcy Attorney?

Yes, a knowledgeable bankruptcy attorney in your area will help you achieve your goals through the bankruptcy procedure.

Every case is different. Find out which bankruptcy type best suits your needs before proceeding with personal or commercial bankruptcy. A bankruptcy lawyer can review your case’s circumstances, options, and each decision’s consequences. Additionally, the majority of lawyers will provide you with a free consultation.

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