Any business or personal debt that qualifies for a Chapter 7 discharge will be erased as long as an individual or sole proprietor files for Chapter 7 bankruptcy. Find out what you should know about Chapter 7 and business debt, including:
You'll also learn why the most effective way to erase your responsibility to pay business debts is to file for Chapter 7 bankruptcy yourself. But keep in mind you could lose property in Chapter 7, making it essential to meet with a knowledgeable local bankruptcy lawyer.
In most cases, no, because unless the business is a sole proprietorship, a business can't discharge debts in Chapter 7. The business will remain responsible for the obligation.
Learn about small businesses and bankruptcy.
Yes, many debts that might drive a business owner to consider filing for bankruptcy can be erased if the business owner files an individual Chapter 7 case. Because of this, it's common for business owners to wait until after the business closes to file a personal Chapter 7 than put the business itself in Chapter 7.
This approach is more beneficial because the owner can wipe out personal guarantees for business debt and the filer's personal debt. Also, a filer doesn't have to take the Chapter 7 means test to qualify for Chapter 7 if the filer's business debt is more than the filer's personal debt.
Find out more about what happens when you're personally responsible for business debts.
You can erase any business debt you're responsible for paying if the debt generally qualifies for a Chapter 7 discharge. For instance, The following is a list of debts anyone can wipe out in Chapter 7 bankruptcy:
It's important to notice you must return collateral to erase a "secured" loan. But in all likelihood, you'd need to do so if the Chapter 7 bankruptcy was part of a company winddown. You'll find more about using Chapter 7 to close a company below.
A creditor with a lien on collateral can take back the property securing the loan if you don't make your payments, even if you file for bankruptcy. Find out more about what happens to liens in Chapter 7 bankruptcy.
Some types of debt aren't dischargeable in Chapter 7 bankruptcy regardless of whether the obligation is a personal or business debt. Some common types of nondischargeable debt include:
Learn more about using Chapter 7 bankruptcy for business debts in Chapter 7 for Small Business Owners: An Overview.
If the Chapter 7 trustee sells your property, it's likely the proceeds will be used to pay toward your nondischargeable debt, lowering the amount you'll owe after bankruptcy. The trustee must pay priority debts first, and most priority debts are nondischargeable, although student loans are a notable exception.
You can use Chapter 7 bankruptcy to wind down a business transparently, but better options usually exist. Not only does Chapter 7 bankruptcy hold special problems for partnerships, such as opening up the partners' personal assets to creditors, but filing Chapter 7 for a corporation or LLC might not be a good idea, either.
Not only does the business not receive a debt discharge, but the bankruptcy opens up a forum for creditors to easily address other potential grievances and attempt to make officers and others personally liable for business obligations.
Before moving forward with a business Chapter 7, consider retaining a bankruptcy attorney or business lawyer. A lawyer is in the best position to advise you about your options when dissolving the business.
Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!
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