Chapter 7 is the federal bankruptcy code chapter for total liquidation. A court-appointed trustee sells non-exempt assets to pay creditors, and remaining eligible debts are discharged.
Chapter 7 bankruptcy is the simplest and fastest bankruptcy process — typically resolved in 3–6 months. A trustee is appointed to collect and sell (liquidate) the debtor's non-exempt assets. Proceeds are distributed to creditors in statutory priority order: secured creditors first, then priority unsecured creditors (tax debts, employee wages), then general unsecured creditors. For individual business owners (sole proprietors, partners with personal liability), Chapter 7 discharges eligible personal debts after liquidation. For corporations and LLCs, Chapter 7 liquidates the entity with no discharge — the legal entity simply ceases to exist after creditor distribution. Most small business owners cannot reorganize under Chapter 7 — if the goal is to keep the business running, Chapter 11 or Chapter 13 (for sole proprietors) are the applicable tools. Chapter 7 is appropriate when the business is shutting down anyway and the owner wants an orderly wind-down rather than creditor chaos. Filing Chapter 7 triggers the automatic stay, which immediately halts all collection actions, lawsuits, foreclosures, and creditor contact. This stay provides breathing room during the liquidation process.
No. Chapter 7 is a liquidation — the business ceases operations. A trustee takes over, sells assets, and the entity dissolves (for corporations/LLCs) or the owner receives a discharge (for sole proprietors). If the goal is to keep operating, Chapter 11 or Chapter 13 are the reorganization alternatives.
Secured creditors (with collateral — equipment lenders, mortgage holders) have priority. The trustee either sells the collateral and pays them from proceeds, or the secured creditor is permitted to repossess (via relief from the automatic stay). Secured creditors generally recover better than unsecured in Chapter 7.
A Chapter 7 stays on a personal credit report for 10 years (corporate filings affect business credit). Most traditional lenders and SBA lenders have post-bankruptcy seasoning requirements — typically 2–5 years post-discharge before reconsidering. Some non-bank lenders may consider applications sooner, with tighter terms.
Yes. An ABC is a state-law alternative to bankruptcy — a private, out-of-court wind-down where the business assigns assets to a third-party assignee who liquidates and distributes proceeds. ABCs are faster and cheaper than Chapter 7 but don't provide the automatic stay or discharge of personal liability. Used when the owner has creditor cooperation.