Business Debts That Can Often Be Wiped Out
Closed your LLC, but still paying on the credit card? Many of the debts that push you into bankruptcy can be wiped out in a personal Chapter 7 filing. If you are personally liable for a business credit card, that is also something the court can wipe out. The trustee sells any property that is not exempt and uses the money to pay creditors. In an individual’s Chapter 7 case, the court generally discharges, or wipes out, what is left unpaid on eligible debts, with exceptions.
Because you may have had a card for your company, as opposed to your household, you may think you’ve been let off the hook when you close the business. A personal Chapter 7 discharge may erase eligible personal liability, but it does not erase the company’s debts. Creditors can still collect on debts the LLC or corporation owes. For example, you closed your LLC and it owes on its own card. The card company could still pursue the LLC. More about that in a moment.
Besides credit card bills, business debts that can often be wiped out this way include lawsuit judgments, hospital and doctor bills, and personal loans and promissory notes.
If you ran the business as a sole proprietor, you might be able to wipe out debts you had as a sole proprietor. That includes unsecured debts to suppliers, consultants, accountants and architects; commercial, residential and equipment leases and contracts.
Secured loans are different. A secured debt is one backed by property you pledged as collateral. Bankruptcy can temporarily restrict repossession, although a lender’s rights in collateral may survive a discharge. The deficiency (the debt above the collateral value) can generally be discharged, but the lien and repossession right typically remain.
Surviving Chapter 7 Unscathed
Not every debt can be erased by a personal Chapter 7. Examples include certain court fines, criminal restitution, alimony and back child support.
Certain taxes make it through the Chapter 7 process. Those include certain recent back taxes, tax debts for which no return was filed, the employee share of Social Security and Medicare withheld funds, and loans taken out to pay those nondischargeable taxes.
Some things that can also survive Chapter 7 include luxury charges over $900 to one creditor within 90 days of filing and cash advances over $1,250 within 70 days (both presumed nondischargeable if the creditor objects; thresholds for cases filed on or after April 1, 2025), plus money borrowed from your own 401(k) or retirement plan. “So wait,” you say. “What if I took a credit card cash advance to pay a recent tax bill? That’s it both ways then, right?” Generally, yes. Credit card debt used to pay a tax that itself can’t be discharged survives the Chapter 7. Many student loans require a showing of undue hardship to be discharged. Frauds like lying on a loan application are not dischargeable in bankruptcy if the creditor proves it to the judge. Death or injury caused by drunken driving is not dischargeable.
Liquidating Insolvent Companies
Debts owed by an LLC or corporation survive your personal Chapter 7 filing. Those need another solution. There are three options.
Wind up and dissolve. If the owners are not personally liable, the LLC or corporation can generally be wound up, using what it has left to pay its debts, and then dissolved by filing at the state corporate or LLC office. That’s the case whether a personal Chapter 7 case wiped out your personal liability on the debt, or you were never on the hook anyway. Dissolution requirements vary by state, and final fees, reports and taxes may still be due. A business that is winding up is generally legally bound to pay its creditors as far as it can, and creditors come ahead of the owners. If there are business loans to pay, those need to be repaid before the owners of the company can get any money.
Assignment for the benefit of creditors can be a solution. A professional firm specializing in liquidating insolvent companies sells the assets and pays creditors. Paid on a percentage basis, it has an interest in getting the best price. Remaining obligations depend on the process and applicable law.
A Chapter 7 for the business is another option. Business Chapter 7 is Chapter 7 bankruptcy for separate entities (an LLC or corporation). (This is not the personal Chapter 7 you heard about; this case is filed for the LLC.) A bankruptcy trustee will generally sell its assets, and creditors get paid from whatever those sales produce, in order of legal priority. An LLC or corporation does not receive a Chapter 7 discharge of its debts. An LLC or corporation generally can’t file this case on its own; it must be represented by a lawyer.
About Delancey Street
Delancey Street is a business debt settlement company that negotiates with funders for business owners. Our goal is simple: negotiate proposed settlement terms, subject to funder agreement. We are based in New York. We tell you how it is; because your business and future is on the line.
