Clearing Obligations and Starting Anew Under Liquidation Principles of the United States Bankruptcy Code

Clearing Obligations and Starting Anew Under Liquidation Principles of the United States Bankruptcy Code

One of the toughest decisions any businessman or person has to make is the one involving letting go of the work and fruits of their own creation. All the time and hard work spent on creating your own business or otherwise growing your personal portfolio is definitely not easy and in fact it is disheartening for even the most seasoned and toughest businessmen or person. Holding on to a declining business may not be profitable, but letting go and clearing yourself with a clean check will definitely make life a lot easier and provide an opportunity to start afresh.

In case of operation of a company where there is a huge debt burden and / or the firm is unable to repay principal and interest amounts towards meeting the requirements of the loan, the owners or hired management may choose to file for bankruptcy under the clauses of a particular chapter provided they meet the requirements. Under most circumstances, unless there are personal guarantees involved, the debt of the corporation does not inure to the owner or owners of the corporation.


Chapter 7 bankruptcy is good for situations where the debt overburdened business is unable to restructure the debt, has a bleak future either in terms of operational efficacy or uneconomical environments such as those of very low growth. A business facing such a scenario is unlikely to be able to repay its obligations or negotiate a position where it might have an opportunistic position. Such business may be beyond saving and if kept only waste the efforts for resurgence. Hence a chapter 7 bankruptcy is an ideal proposition where the liability is limited to the balance sheets of the business and in turn safeguards interests and assets of the owner.

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Chapter 7 bankruptcies are one of the most common bankruptcies which are filed. Under chapter 7 bankruptcy the authorized individual or the owner ceases business operations and transfers them to an immediately appointed trustee. The Trustee is enabled to take a judgment deciding the fate of the business. In most cases the business is completely liquidated with the proceeds from liquidation being passed on to the creditors to make good on their existing debt.

When can you not file for chapter 7 bankruptcy?

Certain scenarios arise where due to the financial position of the business owners and so as to prevent use of chapter 7 as a safety net, the owners would be ineligible to file for bankruptcy.

  • Means test – the courts will assess in a certain manner whether the individual possess the means in order to repay the liabilities after exempting certain essential necessities such as food, shelter, etc, ascertaining which the owner may not file or Chapter 7 bankruptcy.
  • Assets which are identified as non – exempt may be liquefied for settlement of creditor’s claims. Most liens such as mortgage loans fall under the category of non – exempt assets and such will be seized and sold off for settlement of claims.
  • Owners may also be ineligible to file a chapter 7 bankruptcy in case his income is higher or at par with the state median income
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What Chapter 7 bankruptcy does?

Within the time limit of 60 days, if no complaints are recorded against the individual or both the creditors and the trustee give their consent for discharge, the debts against the individual are effectively removed and this provides lawful protection to the individual from any future claims if any. It should be noted that certain obligations still do exist such as specific taxes and spouse & child support. All in all Chapter 7 Bankruptcy provides relief to an individual by clearing past debts and giving an opportunity to start afresh.

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