Chapter 7 Bankruptcy
Chapter 7 bankruptcy can be a way to save a struggling business — provided that your business is a sole proprietorship, or you’ve personally guaranteed its debts. Privately, Chapter 7 bankruptcy is generally used by individuals who have become mired in debts that they are unable to pay. Chapter 7 bankruptcy is a very useful financial tool, but it may take a Chapter 7 bankruptcy attorney to appropriately navigate.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a type of liquidation. Under Chapter 7 bankruptcy, assets are liquidated to pay off debts. The debts that remain are written off, with some minor exceptions. Chapter 7 bankruptcy lets individuals start with a clean slate. It can also help sole proprietors/schedule C business owners discharge debts that they were personally liable for.
It’s important to note that there are things that are protected from liquidation under Chapter 7 bankruptcy, such as a residential home and a primary car.
To qualify for Chapter 7 bankruptcy, you will need to show that you cannot reasonably pay off your existing debts, for the foreseeable future, without significant financial hardship. You will need to disclose your debts, income, and assets, and everything will be looked over by the bankruptcy court. A bankruptcy lawyer will be your advocate during this time, helping you put together your documentation, and helping you plead your case to the court.
Once the bankruptcy has been approved, liquidation and debt payment will follow. The goal of the debt payment will be to pay off as many of your debts as possible. Generally, taxes will take priority before anything else. If your business has a significant tax debt, this will be paid out of your liquidated assets before other debts, such as unsecured credit card debts.
Following the Chapter 7 bankruptcy, you may find it difficult to procure additional lines of credit — which can be a challenge for a business. But very shortly, your credit score will start to recover. While bankruptcy does impact a credit score, the credit score starts to improve as the bankruptcy ages.
What Can’t Chapter 7 Bankruptcy Discharge?
Court fees, penalties, and personal injury charges are among the things that Chapter 7 bankruptcy cannot touch. Additionally, some tax debts, and unsecured debts not on your filing, will not be discharged. Chapter 7 bankruptcy also won’t discharge child support, alimony, and student loans.
But Chapter 7 bankruptcy will discharge a lot of other unsecured debts. Complications will arise when the debts are secured. Secured debts, such as real property, need to go through a recertification process. If there’s a lot of equity, they may be liquidated. If there isn’t a lot of equity, it may be possible to retain the loan, but the lender will need to agree.
If you have questions about whether your debts are dischargeable, your lawyer can answer. It may be situational, as you may have debts that are under the business but not you, or are secured by the value of a property.
Why is Chapter 7 Bankruptcy Good for Business Owners?
Sole proprietors tend to personally guarantee their debt. It’s essentially their debt because they and their business are the same entity. So, when a business owner goes through the process of Chapter 7 bankruptcy, they can wipe out some of their business debts — potentially all of them. This bankruptcy can make it possible for a business that is struggling to continue to exist.
But it does come at a personal cost. The business owner is going to have bankruptcy on their file. On the other hand, the bankruptcy is going to drop off their file after seven years, and in that time, they may be able to recover their company’s financial status.
When Won’t Chapter 7 Bankruptcy Help?
Chapter 7 bankruptcy isn’t going to help a business owner who doesn’t have the business debts under themselves. So, for a corporation with multiple people, or an LLC, a Chapter 7 bankruptcy usually isn’t advised. The company itself would need to declare bankruptcy rather than an individual business owner.
Chapter 7 bankruptcy also won’t help if the company and the individual can realistically pay their debts. In that situation, it’s usually advised to declare a Chapter 13 bankruptcy and get on a payment plan. Chapter 7 bankruptcy is for those who can’t realistically pay their debts with their income for the foreseeable future.
When is Chapter 13 Bankruptcy a Good Idea?
Chapter 13 bankruptcy is a good idea if you cannot qualify for Chapter 7 bankruptcy, or if you feel that your debts would be manageable with a little help. Under Chapter 13 bankruptcy, you create a payment plan designed to pay off your debts for 3 to 5 years. Once you’ve finished that plan, the remaining debts (with some exclusions) are wiped out.
Should You Declare Chapter 7 or Chapter 13 Bankruptcy?
Both Chapter 7 bankruptcy and Chapter 13 bankruptcy can relieve the pressure of some of your debts. Ultimately, it will come down to how much you owe on your debts and whether you can reliably pay them off. Chapter 13 bankruptcy tends to have less of an impact on your credit score, but Chapter 7 bankruptcy will relieve more debt right away.
Are you wondering whether Chapter 13 or Chapter 7 bankruptcy might be right for you? The best thing to do is consult with a professional. Contact Trapp Law at the form below and discuss your case with a chapter 7 bankruptcy attorney today.