Chapter 7 Bankruptcy

Chapter 7 provides either a structured liquidation for businesses or debt relief for individuals, depending on the filer. For businesses, Chapter 7 focuses on winding down operations and liquidating assets, while for individuals, Chapter 7 provides debt relief and a fresh financial start.

Chapter 7 for Businesses

For businesses, Chapter 7 is intended to provide a structured and transparent wind-down when continued operations are no longer feasible. It is important to understand that a business Chapter 7 is a liquidation proceeding—not a formal dissolution of the legal entity. Filing Chapter 7 does not automatically cancel or terminate the company’s corporate existence under state law. Any steps to formally dissolve the company must be taken separately.

Once a business files for Chapter 7:

• All business operations cease (aside from limited activities necessary to preserve value).
• A Chapter 7 trustee is appointed immediately.
• The trustee—not the owners or management—exercises complete control over the company’s assets.
• The trustee reviews the business’s financial affairs, identifies assets, and determines how (or whether) those assets should be liquidated.

The trustee—not the debtor—controls all decisions regarding liquidation, abandonment, or retention of assets, subject only to review and approval by the Bankruptcy Court when required.

• Secure and inventory assets
• Collect receivables
• Liquidate property, equipment, or intellectual property
• Pursue avoidance actions
• Terminate leases and contracts
• Administer payroll, taxes, and final reporting obligations

Businesses face no income-based eligibility requirements. However, business debtors also do not receive a Chapter 7 discharge. Debts technically remain, but once assets are liquidated, remaining obligations are effectively uncollectible. This is separate from formal dissolution.

Chapter 7 for Individuals

For individuals, Chapter 7 eliminates most unsecured debts, including:

• Credit cards
• Medical bills
• Utilities
• Personal loans
• Deficiency balances
• HOA/condo dues
• Certain qualifying income tax debts
• Personal guarantees

Exemption laws often allow individuals to retain most or all property.

For individuals, there are income-related eligibility requirements. If an individual’s income is high enough that filing under Chapter 7 would be deemed an abuse of the bankruptcy process, the court may dismiss the case or convert it to a repayment plan under Chapter 13 or Chapter 11.

To assess whether an individual qualifies for Chapter 7, a threshold comparison must be made between the person’s current monthly income—as defined in the Bankruptcy Code—and the median income for a household of the same size in the same state. If the person’s income is below the applicable median, they automatically qualify for Chapter 7. If the income is above the median, however, the person must complete the “means test” to determine eligibility. The means test is a detailed formula that deducts allowed expenses from income. If, after completing the test, the individual has excessive monthly disposable income, then a presumption of abuse arises. Unless the individual can rebut that presumption, they will not be eligible to proceed under Chapter 7. That said, certain individuals are exempt from the means test, such as those with primarily non-consumer debts or qualifying disabled veterans.

Chapter 7 Discharge

Only individuals can receive a discharge. The discharge order is usually entered about 60 days after the meeting of creditors.

If you are considering Chapter 7—whether as an individual or a business—call Bankruptcy Attorney Co. today for an evaluation of your options.