Small business owners who are under immense pressure to repay their business loan may file for Chapter 7 bankruptcy. However, it should be kept in mind that not every business owner can take advantage of Chapter 7 bankruptcy.
Therefore, it will be better for the debtors to understand how filing Chapter 7 bankruptcy might help them and how it might not.
Is Chapter 7 bankruptcy a good option?
Small business owners should consider the following reasons before filing Chapter 7 bankruptcy:
- Loss of business – People with business debt may have to shut down their business if they file for Chapter 7 bankruptcy. However, bankruptcy courts sometimes slap a temporary closure notice on a debtor’s business. Those who are not prepared to part off with their business should consider this point very seriously. It is good to note that business owners with less number of personal assets may be eligible to get exemptions on liquidation of their assets and keep their business running while Chapter 7 bankruptcy proceedings are on.
- Personal liabilities – Under Chapter 7 bankruptcy, only those loans that were signed by the filer will be considered for discharge. People who directly own a business will be held liable for the business loans and can get them discharged through Chapter 7 bankruptcy. However, in case of a group held business like a corporation or limited liability company (LLC), people will be held responsible for the loans for which either they are co-signers or acted as guarantors.
Apart from the above information, business debtors should know that Chapter 7 bankruptcy has limited provisions to grant debt relief in many cases. Therefore, one should know which debts are dischargeable and are not, through Chapter 7 bankruptcy.
Debts that do not get discharged under Chapter 7 bankruptcy will remain a liability for the filer. Here is a short list of the most common non-dischargeable debts:
- 401(k) loans or other similar loans that were borrowed from one’s pension plan.
- DSOs or domestic support obligations like alimony, child support, etc.
- Internal Revenue Service or IRS debt like medical insurance (Medicare) taxes, Social Security taxes, funds taken from a credit card to make tax payments, back taxes and so on.
- Debts due to resorting to unfair means.
Moreover, one should never forget that Chapter 7 bankruptcy has been mainly designed to free a debtor from his personal financial liabilities. Here is a short list of the dischargeable debts under this bankruptcy.
Under Chapter 7 bankruptcy, primarily all the unsecured debts are discharged, some of which are as follows:
- Lawsuits decree
- Credit card debt
- Payday loans, promissory notes and different other personal loans
- Contractual obligations due to sole proprietorship
- Outstanding bills of contractors, suppliers, and other professionals
However, in case of secured debts which are obtained after pledging collateral; most of the time creditors liquidate the collateral (or assets) to secure their loan money. However, a deficiency (the difference between a secured debt and the collateral) is discharged through Chapter 7 bankruptcy.
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