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Which Business Debts Are Discharged in Chapter 7 Bankruptcy?

When a business owner files for bankruptcy, creditors might be concerned about how and what they’ll recover for debts owed. Here, we’ll discuss which business debts could be discharged in Chapter 7 bankruptcy and your rights as a creditor.

Debts Discharged in Chapter 7 Business Bankruptcy

While individuals can discharge unsecured debt by filing for Chapter 7 bankruptcy, business owners aren’t entitled to a debt discharge unless the business is a sole proprietorship.

The business and the owner are considered one entity in a sole proprietorship. If an LLC, corporation, or another type of business files for Chapter 7 bankruptcy, they will be responsible for their business debts. Through liquidation, the appointed Trustee sells the business assets, which funds payments to creditors.

However, if an owner has personally guaranteed debts owed by the business, they could file for personal bankruptcy to obtain a discharge. Only debts the business owner has personally guaranteed  can be wiped out through the personal Chapter 7 bankruptcy. These debts might include:

  • Credit card payments
  • Medical expenses
  • Lawsuit judgments
  • Personal loans
  • Promissory notes
  • Debts associated with leases and contracts signed by a sole proprietor
  • Other unsecured debt owed by a sole proprietor

Most secured liens cannot be extinguished through a Chapter 7 bankruptcy. Suppose a business owner files for consumer bankruptcy and owes a secured debt. In that case, the creditor can obtain Court permission to recover their collateral. The creditor also has the right to object to the discharge of specific types of unsecured debt.

How Creditors Can Object to a Debt Discharge

Debtors in Chapter 7 bankruptcy cases are not automatically entitled to a discharge. Creditors can challenge a discharge by filing an objection in court. When a debtor files for bankruptcy, the creditor receives a notice that includes important information about the case, including the deadline for objecting to the discharge. The creditor would need to file a formal complaint before that deadline passes. This complaint is a type of lawsuit known as an adversary proceeding.

There are many reasons why the court could deny a discharge in a Chapter 7 bankruptcy case. Some of the reasons laid out in Section 727(a) of the Bankruptcy Code include:

  • Making false statements under oath
  • Hiding or destroying books or records
  • Failure to satisfactorily explain a loss of certain assets
  • Refusing to obey lawful orders issued by the court
  • Attempting to hinder, delay, or defraud creditors by transferring or concealing property

As a creditor, you could object to the debtor’s right to discharge for any of the reasons listed in Section 727(a). If the debtor has been granted a discharge in a previous matter and is not entitled to another discharge, you could also challenge a discharge on those grounds. However, the burden of proof will be on you to prove your case. That’s why it is crucial to hire a creditors’ rights attorney to fight for you.

If a business owner owes you a debt and they have filed for Chapter 7 bankruptcy, you should contact a creditor’s rights attorney to discuss how you can enforce your rights as a creditor.

Contact a North Carolina Creditors’ Rights Attorney Today

At Crawford & von Keller, LLC, our creditors’ rights attorneys have more than 70 years of combined experience serving clients. We provide personal attention and top-notch representation throughout all stages of the process. Contact us by phone or online for a confidential consultation to discuss your case.

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