Are all debts discharged in a business bankruptcy? If not, which ones are not?
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The specific debts that may be be discharged during a business bankruptcy may depend on the type of bankruptcy that is filed. In many cases, no debts are discharged during the early stages of a business bankruptcy because the business declares Chapter 11 bankruptcy. In the event of a Chapter 7 bankruptcy filing, some debts may be discharged only after the assets of the business have been sold to repay creditors.
How Will Chapter 11 versus Chapter 7 Business Bankruptcy Filings Affect Debt Discharge?
The key to understanding what will happen to business debts during a bankruptcy lies in the bankruptcy chapter under which the business files:
- Under Chapter 7, or liquidation bankruptcy, the business is disbanded and ceases to exist. This form of business bankruptcy is less common and is used generally only when it is clear there is no way for the business to become profitable. Under a Chapter 7, the assets of the business are sold and the proceeds that are generated from this sale are used to pay back the debts owed. Any remaining eligible debts are discharged. This includes most debts, except for debts like secured debts owed on real property, which may be foreclosed upon.
- Under Chapter 11, or re-organization bankruptcy, the business continues to exist. The business and its debts are re-organized, and a repayment plan is created. Usually, a trustee oversees the repayment plan and may even take over financial management of the business as a whole. Most debts are part of the repayment plan, with limited exceptions such as an exception for secured debts, and the company pays those debts back over time. At the end of the repayment plan, any unpaid debt that remains is generally discharged.
You may need help with some of the decisions that you’ll have to make as you file for business bankruptcy and deal with the impact of the bankruptcy on your debts. It’s recommended that you speak with a lawyer who specializes in business bankruptcy in order to make sure you are making the best choice possible for you and your business.