Business Debts in Chapter 7 Bankruptcy

Find out if you can discharge business debts if you file a personal Chapter 7 bankruptcy.

Filing for a personal Chapter 7 bankruptcy doesn’t eliminate the debts your business owes as a separate entity. But it can wipe out your liability for any business debts you are on the hook for personally. Read on to learn more about what happens to business debts in Chapter 7 bankruptcy.

For more information on which debts you can discharge in bankruptcy, see our topic area on Your Debts in Chapter 7 Bankruptcy.

Who Is Liable for Your Business Debts?

In general, whether you are personally liable for your business debts depends on:

  • the structure of your business (such as a sole proprietorship, partnership, limited liability company, or corporation), and
  • whether you cosigned or personally guaranteed the debt.

In most cases, if your business is organized as a sole proprietorship or general partnership, you will be on the hook for all of your company’s debts. But if you have a corporation or limited liability company (LLC), creditors typically can’t go after your personal assets to satisfy business debts unless you personally guaranteed or cosigned the obligation.

To learn more about when you might be responsible for the debts of your business, see Are You Personally Liable for Business Debts?

What Happens to Business Debts in Chapter 7 Bankruptcy?

If you are not liable for the debts of your business, you don’t need to include them in your personal bankruptcy. But if you wish to shut down your business, keep in mind that your business can also file its own bankruptcy as a separate entity.

If you are on the hook for your company’s debts, you can eliminate your personal liability by filing for Chapter 7 bankruptcy (unless the debt qualifies as a nondischargeable priority claim). But be aware that while Chapter 7 bankruptcy can discharge your personal obligation to pay back business debts, creditors can still go after the assets of your business to satisfy their debts.

For more information on bankruptcy options for small business owners, see our topic area on Bankruptcy for Small Businesses.

What If a Business Creditor Has a Lien on Your Property?

If your business doesn’t own many assets, you may have had to pledge some of your personal assets as collateral in exchange for getting a business loan. In most cases, if a business creditor has a lien or security interest in your property, filing for Chapter 7 bankruptcy will eliminate your personal liability for the debt but not the lien on your property.

This means that a creditor who has a lien on your property can still foreclose on or repossess it even after you receive a bankruptcy discharge. But if you satisfy certain conditions, you may be able to reduce your loan balance with a cramdown or get rid of the lien through a process called lien stripping in Chapter 13 bankruptcy.

If you pledged a security interest in your personal assets when you took out a business loan, talk to a knowledgeable bankruptcy attorney in your area who can advise you on the most effective way to handle the lien on your property.