Chapter 7 Bankruptcy – Could Be A Savior for Business Owners in Debt

Has Covid-19 affected the revenue of your business? Have you incurred loss and debts at the same time in 2020? Do you have enough money to clear your business debts?

If you do not have surplus funds to clear your business debts, then you have two options at your disposal.

You can file a Chapter 7 bankruptcy to pay off your business debts.

You can file a Chapter 11 bankruptcy to clear your business debts.

Chapter 11 or 7 bankruptcy?

Chapter 11 bankruptcy is an expensive and time-consuming process. You have to spend a lot of money and time to repay debts. Honestly speaking, Chapter 11 bankruptcy is suitable for large organizations. So, if you are an independent and small entrepreneur, it is best to avoid filing Chapter 11 bankruptcy.

Chapter 7 bankruptcy is liquidation or straight bankruptcy. In this type of bankruptcy, the court-appointed trustee liquidates all your business assets and your company is dissolved at the end of the process.

Can you file Chapter 13 bankruptcy to pay off business debts?

Chapter 13 bankruptcy is a reorganization plan wherein you pay off your debts within 3 to 5 years. In this type of bankruptcy, your debts are restructured to help you pay back your creditors. Unfortunately, it is not allowed to pay off business debts through Chapter 13 bankruptcy. However, you can file for Chapter 13 bankruptcy in your individual capacity to support your business indirectly. But you cannot touch your business debts in this type of bankruptcy.

How does Chapter 7 bankruptcy help your business?

Many people prefer to file Chapter 7 bankruptcy as it is the cheapest and quickest way to get out of debt. It isn’t that your business debts will be eradicated through Chapter 7 bankruptcy. But, at the end of the bankruptcy process, your business will have zero value. So, creditors cannot collect anything at all. Ultimately, your business will be dissolved once it is allowed legally.

What if you want to preserve your small business anyhow? Well, in that case, you can use Chapter 7 bankruptcy in your personal capacity to safeguard your small business.

How does it work?

First, it is best to clear one point from the very beginning. Filing Chapter 7 bankruptcy is not the best option to take care of your business debts. It may not even work for your small business. However, when you pay off your personal debts, you can have more money at your disposal for your business growth. You can increase the business cash flow and help it to thrive until the revenue becomes normal again.

Is there any drawback of filing Chapter 7 bankruptcy?

Like two sides of the coin, there are a few drawbacks of Chapter 7 bankruptcy. The US bankruptcy trustee will sell all your non-exempt assets to help you discharge your debts. No one will take your primary residence and touch your retirement savings accounts. But your non-retirement savings, investment accounts, and other assets that are in your name can be sold.

Once the sale proceeds are used to pay off your debts, the court will consider your debts as settled. Make sure you do not reaffirm your debt and agree to make payments after bankruptcy. If you do so, you will be back to square one. You will have to make reduced payments by fetching less income from your business and run it instead. But your personal financial obligations will be clear.

You can reorganize your assets and debts before filing for bankruptcy. The court will check and evaluate all your transactions made before filing bankruptcy. So, you have to be extremely careful. If the court finds that you have made certain transactions to hide your assets and money, then it may dismiss your bankruptcy case. Consult a bankruptcy attorney through an attorney marketplace and your accountant before making any transactions.

What should you do before filing for Chapter 7 bankruptcy?

An attorney plays a big role in bankruptcy. He can guide you through the entire process. An experienced attorney can help you to discharge your debts successfully. So, before you file for bankruptcy, you should find an experienced attorney in your area. You can ask your friends to recommend a good attorney. You can also explore an attorney marketplace to get the best legal expertise in your area. You can search for an attorney marketplace online.

An attorney marketplace is an online platform where you can connect with attorneys in your area. You can find attorneys within your affordability. You can submit your requirement and get a list of attorneys who match your criteria. Try to focus on an attorney who specializes in Chapter 7 bankruptcy to get the best help.


In Chapter 7 bankruptcy, both you and your spouse do not need to file bankruptcy jointly. You can file bankruptcy individually to safeguard your spouse’s assets and income. However, keep one fact in mind. You can only protect assets that are in your spouse’s name only. You cannot safeguard the joint asset. Again, you can contact any credible attorney who knows all the federal and state laws through an attorney marketplace for the best legal advice.

A personal Chapter 7 bankruptcy may help your business to survive a downturn. So, it might be a prudent move. However, no one can say what will happen in the long-term. You should evaluate your options and the worst-case scenario before taking any risk.

Author Bio:

Amy Nickson is a web enthusiast. She is associated with where she shares her expertise through her crisp and well-researched articles on a regular basis.


Attorney Gregory Oberhauser

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Gregory Oberhauser is the ONLY attorney in Massachusetts to be distinguished as an ACS-CHAL Forensic Lawyer-Scientist by the American Chemical Society!

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