Chapter 7 bankruptcy is liquidation bankruptcy. For businesses, it means the end—the business closes, assets are sold, and proceeds distributed to creditors. But for business owners personally, it can mean freedom from crushing personal guarantee debt.
Two Types of Chapter 7
Business Chapter 7
- Business entity files (corporation, LLC)
- Business assets liquidated
- Proceeds distributed to creditors
- Business ceases to exist
- Does NOT discharge personal guarantees
Personal Chapter 7 (For Business Owners)
- Individual files bankruptcy
- Discharges personal liability on business debts
- Protects certain personal assets (homestead, retirement)
- THIS is what most business owners need
When to Consider Chapter 7
- Business has closed or is closing: No point in keeping it going
- Personally guaranteed business debts: You're on the hook personally
- Can't afford to pay: No realistic way to repay
- Creditors threatening personal assets: Home, savings at risk
- SBA loan or MCA debt with personal guarantee: Can't negotiate settlement
- Want clean break: Start fresh without debt hanging over you
What Gets Discharged in Chapter 7?
Can Be Discharged:
- Credit card debt (business and personal)
- Personal guarantees on business loans
- Medical bills
- Personal loans
- Most unsecured business debts
- Deficiency balances (after repossession)
- Old income taxes (3+ years old, meeting criteria)
Cannot Be Discharged:
- Payroll taxes (trust fund): NEVER dischargeable
- Recent taxes (under 3 years)
- Student loans (rare exceptions)
- Child support, alimony
- Debts from fraud or willful injury
- Most fines and penalties
- Debts not listed in bankruptcy (accidentally omitted)
Exemptions: What You Keep
Chapter 7 is NOT "lose everything." Bankruptcy exemptions protect essential assets.
Federal Exemptions (Available in Some States)
- Homestead: $27,900 equity in home (2023)
- Vehicle: $4,450 equity per vehicle
- Retirement accounts: Unlimited (401k, IRA up to $1.5M)
- Personal property: $14,875 total
- Wildcard: $1,475 + unused homestead (up to $14,875)
State Exemptions (Vary by State)
- Florida: Unlimited homestead exemption
- Texas: Unlimited homestead exemption
- California: Choice of two systems ($600K+ homestead in one system)
- Most states: $20,000-$100,000 homestead
Key Point: In most cases, you keep your home (if you can afford the payment and have exemption coverage), car, retirement accounts, and household items.
The Means Test
To qualify for Chapter 7, you must pass the "means test":
Step 1: Compare Income to State Median
If your income is below your state's median for your household size, you automatically qualify.
Step 2: Calculate Disposable Income (If Above Median)
If above median, calculate monthly disposable income after allowed expenses. If it's low enough that you couldn't fund a Chapter 13 plan, you can still file Chapter 7.
For Business Owners: If business has closed, only count current income (unemployment, new job, etc.), not past business income.
Chapter 7 Process
| Step | Timeline | What Happens |
|---|---|---|
| 1. File Petition | Day 1 | File bankruptcy petition, schedules, means test. Automatic stay begins. |
| 2. Meeting of Creditors | 30-40 days | 341 meeting with trustee. Answer questions under oath. |
| 3. Asset Liquidation | 30-90 days | Trustee liquidates non-exempt assets (if any). |
| 4. Discharge | 60-90 days after 341 | Debts discharged. You're free. |
Total Timeline: 4-6 months from filing to discharge
Costs
- Filing Fee: $338 (can request payment plan)
- Attorney Fees: $1,000-$3,500 (average $1,500-$2,000)
- Credit Counseling: $20-50 (required before filing)
- Debtor Education: $20-50 (required before discharge)
- Total: $1,500-$4,000
What Happens to Your Business?
Sole Proprietorship
You and your business are the same legal entity. Personal Chapter 7 includes business assets.
- Business assets become part of bankruptcy estate
- Trustee may liquidate inventory, equipment (unless exempt)
- Business typically closes
- Can start new business after bankruptcy
Corporation or LLC
Business is separate legal entity.
- Business files Chapter 7: Entity liquidated, ceases to exist
- You file personal Chapter 7: Business not affected (but personal guarantee debts discharged)
- Can keep business running while discharging personal liability for business debts
Life After Chapter 7
Credit Impact
- Stays on credit report for 10 years
- Credit score drops 130-200+ points initially
- Can start rebuilding immediately with secured cards
- Many people have 650+ scores within 2 years
- Can buy house in 2-4 years (FHA, VA) or 4-7 years (conventional)
Can You Start a New Business?
Yes! Nothing prevents you from starting a new business after Chapter 7.
- Wait until after discharge (4-6 months)
- Operate as sole proprietor or form new entity
- Qualifying for business credit will be difficult initially
- May need cash reserves or personal financing first 1-2 years
Chapter 7 vs. Chapter 13 (Personal)
| Factor | Chapter 7 | Chapter 13 |
|---|---|---|
| Duration | 4-6 months | 3-5 years |
| Debt Discharged | Most unsecured debt | Some unsecured debt (what you can't pay) |
| Assets | Non-exempt assets liquidated | Keep all assets |
| Payment Plan | No | Yes (3-5 years) |
| Best For | Low income, few assets, need quick discharge | Higher income, behind on secured debts, want to keep assets |
Common Mistakes to Avoid
- Transferring assets before filing: Trustee can reverse "fraudulent transfers" (up to 2 years prior)
- Paying family/friends before filing: Trustee can recover "preferential payments"
- Running up debts right before filing: Those debts may not be discharged (fraud)
- Not disclosing all assets: Bankruptcy fraud is a federal crime
- Filing without attorney: Mistakes can cost you exemptions or discharge
Should You File Chapter 7?
Get a free consultation with bankruptcy attorneys in your area
Get Free AssessmentFrequently Asked Questions
Usually not. If: 1) You're current on mortgage, 2) You have homestead exemption covering your equity, and 3) You can afford ongoing payments, you keep your home. The bankruptcy discharges other debts, making your mortgage more affordable.
Yes. If business is corporation/LLC, it's separate—you can discharge personal guarantees while keeping business running. If sole proprietor, business assets become part of bankruptcy estate, and business typically closes.
8 years from the date of a previous Chapter 7 filing. 4 years if previous was Chapter 13. If you need relief sooner, Chapter 13 is available 4 years after Chapter 7.
Crushed by Personal Guarantee Debt?
Chapter 7 can discharge your liability and give you a fresh start
Talk to Bankruptcy Attorney