Distress & Turnarounds

Chapter 7 Explained

Chapter 7 is not "the business goes away and the debts vanish." It is a stranger taking the keys, selling everything, and paying people in a statutory order. For a company, no debt is forgiven at all.

  • Intermediate
  • 7 min total
  • 12 chapters

What decision this helps you make: Whether a failing business should file Chapter 7, wind down out of court, or use a state-law alternative, and what each choice does to the owner personally.

What this topic is

Chapter 7 of the US Bankruptcy Code is straight liquidation. On filing, an independent trustee takes control of the debtor's non-exempt property, sells it, investigates what happened to anything that left recently, and distributes the proceeds in the order Congress wrote down.

Why it matters

Owners routinely file expecting relief and discover the two facts that matter most: a corporation or LLC receives no discharge in Chapter 7, and every personal guarantee survives the filing untouched. The choice between Chapter 7, an orderly wind-down, and a state-law assignment is one of the highest-stakes decisions a failing business makes.

Who should learn it

Owners and directors of businesses in serious trouble, the advisors around them, and anyone extending credit to a company that might not survive the year.

What you will understand

  • What the trustee is, what they are paid, and what they will come looking for
  • The statutory payment order, worked through with real numbers
  • Why a corporate Chapter 7 discharges nothing
  • When Chapter 7 beats a quiet wind-down, and when it is the expensive answer

Prerequisites

Common misconception

"We will file Chapter 7 and the debts go away." For an individual, largely yes. For a company, no: Section 727(a)(1) of the Bankruptcy Code denies a discharge to any debtor that is not an individual. A corporate Chapter 7 liquidates assets and leaves an empty shell that still legally owes everything. What it changes is who controls the sale, and that is sometimes worth a great deal, sometimes worth nothing at all.