Chapter 7 bankruptcy works well when you don’t have enough income to pay back your debt. Instead, the court sells property and uses the proceeds to pay back creditors. Businesses, as well as individuals, can take advantage of this type of bankruptcy; however, a discharge (debt forgiveness) is available only to individuals.
Individual Chapter 7 Bankruptcy
When possible, most filers (debtors) prefer to file a Chapter 7 bankruptcy for two reasons: It’s quick—usually taking four to six months to complete—and unlike a Chapter 13 bankruptcy, the debtor doesn’t pay into a repayment plan.
Other important aspects of a Chapter 7 bankruptcy include:
A Chapter 7 doesn’t discharge all debts, however. A debtor with a car loan or home mortgage must keep paying it to keep the collateral (the house or car securing the loan).
Some debts, like recent income taxes, child support, and alimony, are never dischargeable. Others, such as student loans, can be discharged only if the debtor meets specific requirements. Still others, such as fraud-related obligations, get wiped out unless the creditor successfully brings a lawsuit opposing the discharge of the debt.
(Find out more by reading Chapter 7 Bankruptcy Timeline.)
Business Chapter 7 Bankruptcy
When a corporate business entity or partnership files for Chapter 7 bankruptcy, the business shuts down. The court will liquidate (sell) virtually all of the company’s assets. Creditors of the debtor will file claims with the court, and the court will distribute the proceeds to the creditors. The company, in essence, ceases to exist.
A bankruptcy involving a sole proprietor, however, is a bit different. Because a sole proprietor is responsible for the company’s obligations, a sole proprietor’s individual finances will always be included as part of the bankruptcy. Also, the sole proprietorship might be able to remain open if the debtor can protect all of the business assets with exemptions. For instance, a company involving primarily labor, such as an accounting office, might survive bankruptcy.
A few other significant differences between individual and business bankruptcies include:
Because of the complicated nature of a business bankruptcy, anytime a company is involved—even in an individual case—it’s prudent to get the advice of a knowledgeable bankruptcy attorney.