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Chapter 7 Bankruptcy for Small Business Owners: An Overview

Chapter-7-Bankruptcy317bAs a business owner that is struggling to make ends meet, filing for Chapter 7 Bankruptcy may be an opportunity to save both the business while providing a simple way to liquidate the business and its assets. While a personal Chapter 7 Bankruptcy can help individuals to get rid of personal liability, it is important to note that a business is its own individual entity and will need to file its own Chapter 7 Bankruptcy.

Very often, business owners consider filing bankruptcy themselves but are very confused about filing bankruptcy for the business itself. In order to save further business losses, or save the sanity of the owners, it is sometimes necessary to file a bankruptcy. Business owners who are looking at a bankruptcy filing need to consult with a bankruptcy attorney that specializes in bankruptcy law, especially corporate bankruptcy law.


One of the frequent questions posed to a Chapter 7 Bankruptcy attorney, is whether or not the owner will be liable for the business debts personally. The answer largely depends on the structure of the business from the beginning, what the corporate documents look like and if there were other parties involved.

If the owner did not form a specific business entity and was the only person who had ownership in the business, then this makes them the sole proprietor. In cases like this, the courts will not look at the business as a separate entity. Due to this, the business owner will be personally responsible for all of the business debts. When the business owner files for bankruptcy, the business owner is actually filing for a personal bankruptcy.

On the other hand, if the business was formed as a partnership, a limited liability company or a corporation, then there are a number of factors that go into determining whether the owners will be responsible for the company’s debt.

Understanding a Chapter 7 Bankruptcy for business

Upon filing the Chapter 7 Bankruptcy on behalf of the business, an automatic stay order goes into effect, prohibiting most collection activities. At this time, one will appoint and charge a business bankruptcy trustee with the task of selling off all of the debtor’s, or company’s, non-exempt assets. Selling off these assets will help to pay the business creditors according to priorities set by the court.

It is important to note that unlike a personal bankruptcy, there are no discharges and no exemptions in a business bankruptcy. What this means, is that in a business bankruptcy all the business assets will be sold off and all the proceeds will be distributed among the creditors.

If the small business owner forms an LLC or a corporation, the benefit is that a Chapter 7 Bankruptcy is a simple and orderly way to liquidate all of the assets, wherein the trustee will be responsible for the liquidation, not the owners.

NOTE: This is for informational purposes only and does not constitute legal advice.