Chapter 7 bankruptcy for a business is a court-supervised liquidation: a trustee sells everything the company owns, pays creditors in a legally fixed order, and the business shuts down. The filing fee is $338, attorney fees typically run $1,000 to $5,000, and most cases close within four to six months. There is no reorganization plan and no attempt to keep the doors open. Once the case ends, the entity is gone.
Any business with property or operations in the United States can file, regardless of how much it owes.1Office of the Law Revision Counsel. 11 USC 109 – Who May Be a Debtor Corporations, LLCs, partnerships, and sole proprietorships all qualify.
What Chapter 7 Does and Doesn’t Wipe Out for the Owner
The single most important thing to understand before filing is what happens to the debt after the case ends, because it depends entirely on entity type.
Only individual debtors receive a discharge, the court order that legally erases remaining obligations.2Office of the Law Revision Counsel. 11 USC 727 – Discharge A sole proprietor, who is legally the same person as the business, can walk away from most business debts through Chapter 7. Corporations, LLCs, and partnerships get no discharge. The case distributes whatever assets exist, the entity dissolves, and any unpaid balances technically survive against a company that no longer exists.3United States Courts. Chapter 7 – Bankruptcy Basics
That distinction matters most when the owner is on the hook personally. Two situations pierce the usual protection of a corporation or LLC:
- Personal guarantees. Lenders routinely require small-business owners to personally guarantee loans, leases, and credit lines. The business’s Chapter 7 case does not touch that guarantee, because the owner is not the debtor. If the sale proceeds don’t cover the guaranteed debt, the lender can pursue the owner. Eliminating that liability requires a separate personal bankruptcy.
- Piercing the corporate veil. If the owner mixed personal and business funds, ignored corporate formalities, or ran the company with too little capital from the start, creditors can ask the court to hold the owner personally responsible for company debts.
Sole proprietors face one extra wrinkle: because their filing is really personal bankruptcy, the means test can apply. It only creates a presumption of abuse when the debts are primarily consumer debts, so an owner whose borrowing was mostly for the business generally isn’t blocked.3United States Courts. Chapter 7 – Bankruptcy Basics Corporations and partnerships skip the means test entirely.
What Happens the Day You File
Filing the petition triggers the automatic stay, a legal freeze that stops nearly all collection activity against the business.4Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay Lawsuits pause. Repossessions stop. Bank levies halt. Even a foreclosure already scheduled on commercial property has to hold. Creditors who deliberately ignore the stay can face sanctions.
Secured creditors can ask the court to lift the stay if their collateral is losing value and the business has no equity in it, or simply because the business has no equity and the property isn’t needed for a reorganization. In a liquidation, that second ground is easy to establish, so secured lenders often get relief and take their collateral back.
The Trustee Takes Over
A court-appointed trustee runs the case. The trustee investigates the company’s financial history, reviews every document filed, and sells whatever has value: equipment, remaining inventory, receivables, real estate, intellectual property.5Office of the Law Revision Counsel. 11 US Code 704 – Duties of Trustee Proceeds go into the estate and get distributed under the statutory order.
The trustee also has clawback powers that catch many owners off guard.
Preferential Payments
If the business paid one creditor ahead of others in the 90 days before filing, the trustee can undo that payment and redistribute the money.6Office of the Law Revision Counsel. 11 USC 547 – Preferences The look-back stretches to a full year for insiders like family members, partners, or officers. Paying off a brother-in-law’s loan eight months before filing is a textbook target.
Fraudulent Transfers
Assets given away or sold for less than fair value within two years of filing can be pulled back.7Office of the Law Revision Counsel. 11 USC 548 – Fraudulent Transfers and Obligations That covers both transfers made to cheat creditors and transfers where the business simply didn’t get a fair price while insolvent. Many state fraudulent-transfer statutes let the trustee reach back further, up to six years in some states.
Who Gets Paid, and in What Order
Not all creditors are equal. Lower-priority creditors get nothing until everyone above them is paid in full.
Secured creditors sit outside the main ladder. A lender with a lien on specific collateral gets paid from the sale of that collateral first. If it sells for less than the debt, the shortfall drops into the unsecured pool. If it sells for more, the surplus goes to the estate.
Among unsecured claims, federal law sets this order:8Office of the Law Revision Counsel. 11 USC 507 – Priorities
- Domestic support obligations owed by the business owner.
- Administrative expenses of the case, including trustee and estate attorney fees.
- Employee wages, salaries, commissions, vacation, and severance earned in the 180 days before filing, up to $17,150 per employee.
- Unpaid contributions to employee benefit plans, also capped at $17,150 per employee net of amounts already paid as wages.
- Certain grain-farmer and fisherman claims, up to $8,450 per person.
- Customer deposits for goods or services never delivered, up to $3,800 per customer.
- Specific categories of income, employment, and excise taxes.
Those dollar caps reflect the federal adjustment effective for cases filed on or after April 1, 2025.9Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases General unsecured creditors, including vendors owed on open invoices, sit below every priority category. In many business Chapter 7 cases, there’s little or nothing left when the trustee reaches them.
What Happens to Employees
Workers owed back pay when the business files come out better than most other unsecured creditors. Wages earned in the 180 days before filing (or before the business stopped operating, whichever came first) get priority treatment up to $17,150 per person, covering salary, commissions, accrued vacation, and severance.8Office of the Law Revision Counsel. 11 USC 507 – Priorities Anything above that cap becomes a general unsecured claim.
Businesses with 100 or more employees also have to think about the federal WARN Act, which requires 60 calendar days’ written notice before a plant closing or mass layoff.10Office of the Law Revision Counsel. 29 USC 2102 – Notice Required Before Plant Closings and Mass Layoffs Missing the notice can create a back-pay liability for each day of the violation. A trustee whose only job is liquidating an already-failed business generally does not inherit that obligation, but a trustee who keeps operating the business does.
Preparing the Filing
Business entities that aren’t sole proprietorships use forms designed for non-individual debtors. The petition itself is Form B 201, with supporting schedules: Form B 206A/B for all property, B 206D for secured creditors, B 206E/F for unsecured creditors, B 206G for contracts and leases, and B 206H for co-debtors.11United States Courts. Instructions for Bankruptcy Forms for Non-Individuals Sole proprietors use the individual-debtor forms, which add income and expense schedules and the means test calculation.
The property schedule needs real detail. Every asset gets a description, a location, and a current value based on what it would actually sell for, not what the business paid. That includes equipment, vehicles, inventory, receivables, intellectual property, cash, and real estate.
The Statement of Financial Affairs (Form B 207 for non-individuals) covers recent financial history: lawsuits, closed bank accounts, property sold or given away in the run-up to filing, and payments to creditors.12United States Courts. Statement of Financial Affairs Instructions This is the document trustees mine hardest for preferences and fraudulent transfers. Accuracy matters more here than anywhere else in the filing.
The IRS requires returns for the last four tax periods.13Internal Revenue Service. Declaring Bankruptcy Unfiled returns will slow the case, so gather bank statements and tax documents before meeting with a lawyer.
Filing and the 341 Meeting
Attorneys typically file the petition and schedules through the court’s Electronic Case Filing system. The $338 filing fee is due at filing.
Within a reasonable time afterward, the U.S. Trustee schedules a Meeting of Creditors, known as the 341 meeting.14Office of the Law Revision Counsel. 11 US Code 341 – Meetings of Creditors and Equity Security Holders A company officer or owner attends and answers questions under oath about assets, debts, and financial history.15United States Department of Justice. Section 341 Meeting of Creditors No judge is there. The trustee runs the meeting, and any creditor who shows up can ask questions. Most 341 meetings run ten to thirty minutes when the paperwork is clean.
After the meeting, the trustee liquidates assets and distributes proceeds. For a sole proprietor, the discharge order usually arrives 60 to 90 days after the 341 meeting. The whole case typically closes in four to six months, though complex asset sales or contested claims can stretch it well beyond that.
Taxes During and After the Case
Filing does not pause tax obligations. The debtor must keep filing required returns and pay any post-filing taxes on time.13Internal Revenue Service. Declaring Bankruptcy Post-petition tax debts are not discharged.
One trap worth flagging: forgiven debt normally counts as taxable income. In bankruptcy, though, debt discharged in a Title 11 case is excluded from gross income.16Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness That spares a sole proprietor a potentially huge surprise tax bill. Corporations and partnerships that dissolve without a discharge can face different tax treatment, and a tax advisor should look at the specifics.
When Creditors Force the Filing
A business doesn’t always choose Chapter 7. Creditors can push it into liquidation with an involuntary petition. If the business has 12 or more creditors, at least three of them must join, with combined undisputed, unsecured claims totaling at least $21,050.17Office of the Law Revision Counsel. 11 USC 303 – Involuntary Cases With fewer than 12 creditors, a single creditor meeting the threshold can file alone. The $21,050 figure reflects the April 2025 federal adjustment.9Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases
Involuntary petitions are uncommon because creditors who file and lose can be ordered to pay the business’s attorney fees and damages. But for a clearly insolvent company that’s shifting assets or favoring insiders, it’s the tool that stops owners from running out the clock.