Many people connect Chapter 7 with bankruptcy, but the law actually provides several types of bankruptcy relief. Differences in bankruptcy cases also depend on whether or not the debtor is an individual or a corporation.

Common types of bankruptcy cases besides Chapter 7 include Chapter 11 and Chapter 13. These parts or "chapters" of the Bankruptcy Code provide debt relief in the form of reorganization. The idea is to restructure debt so it's manageable. The debtor in a Chapter 11 case is almost always a business, and Chapter 13 is used by individuals who have some income free for paying debts.

Chapter 7 is used by both individuals and corporations, and the issues and bankruptcy process may differ, based on the nature of the filer.

Chapter 7 End Result: Discharge or Liquidation

A key difference in Chapter 7 cases filed by individuals and businesses comes at the end of the case. An individual's Chapter 7 bankruptcy ends with a discharge - the court's order ending your duty to pay a debt. Once your discharge is granted and your case is closed, you have a fresh financial start and can rebuild your finances.

A Chapter 7 case filed by a corporation ends with liquidation and it goes out of business. There is no discharge if the debtor is a corporation. Businesses use Chapter 7 when debt problems are so severe that Chapter 11 relief and continuing the business isn't an option.

Different Debtor, Different Issues

When a business files for Chapter 7 or "straight bankruptcy," its case will differ from an individual's case on several issues. Business finances are generally more complex than those of an individual.

Here's a nutshell of a corporation's Chapter 7 case:

  • The business stops operations
  • The bankruptcy trustee sells or liquidates business assets
  • Sales proceeds pay the creditors' and administrative claims first, and stockholders last

Most individual Chapter 7 cases are "no-asset." This means the filer has no assets to pay creditor claims beyond his or her protected or exempt property, which creditors can't reach.

A business, on the other hand, may have assets, but not enough to pay all claims. The order for payment is generally:

  • Secured creditors, such as banks or vendors. Debts are backed by collateral, such as equipment, inventory, real property or other assets. This usually means they're first in line for payment
  • Unsecured creditors, which may include lenders, suppliers or customers. This category also includes some business investors, typically bond holders
  • Stockholders are paid last, if any funds remain after paying all other claims. Often this mean a loss on their stock investment

Business or Individual: Compare and Contrast

Further differences between Chapter 7 cases for businesses and individuals include:

  • Corporations must be represented by a lawyer. Individuals can choose to represent themselves (called "pro se")
  • The required creditors' meeting may be more complex in a business bankruptcy
  • Disputes within the bankruptcy case are more common when a business is the debtor, which the court addresses in an "adversary proceeding"
  • Certain kinds of debts aren't covered by the discharge in an individual's Chapter 7 case, such as alimony, child support and student loans

Sometimes business and personal bankruptcy cases may be related, such as when your corporation files a Chapter 7 case, and you also face filing personally. You may have more complex questions and issues if your business is a sole proprietorship or a partnership and your business and personal finances are more closely connected.

Every situation is unique, and a bankruptcy attorney can help you size up the big picture for your business and personal finances.

Questions for Your Attorney

  • My small business is a corporation, but I've given personal guarantees to back its finances and operations. Does bankruptcy for my business mean personal bankruptcy for me?
  • My business is a sole proprietorship, so what is my best bankruptcy option?
  • How does bankruptcy work for partnerships?