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What Can — And Can’t — Be Discharged In Chapter 7 Bankruptcy For Small Business Sole Proprietors


As the sole proprietor of a small business, struggling with sluggish sales and losses in profits can be devastating, both professionally and personally. After pouring your  own money into the venture, you may be faced with mounting debts and harassing credit collections actions. Filing for Chapter 7 business bankruptcy can help provide the fresh start you need. Find out what debts bankruptcy can-and can’t-eliminate.

Debts That Can Discharged In Chapter 7 Business Bankruptcy

A sole proprietorship is one of the most efficient methods of operating a small business and offers a variety of benefits, such as the ability to claim business profits, losses, and expenses directly through your personal tax returns. At the same time, you can be held personally liable for business debts, which can create problems if you are experiencing a slump in sales.

If you are experiencing downturns in your business, you may have overextended yourself trying to keep things going. As a result, closing may be the best option but it could still leave you facing harassing collections calls and threats of lawsuits, repossessions, property liens, and other legal actions. Filing a Chapter 7 bankruptcy can provide some relief. Commonly referred to as a liquidation, it allows you to get rid of any equipment, supplies, or inventory you still have and get out of contracts you may have entered into. It also allows you to eliminate or discharge certain types of debts. This includes:

  • Past due credit card balances;
  • Balanced on unsecured personal loans;
  • Past due utility bills;
  • Outstanding amounts owed on leases;
  • Personal debts, including medical bills and certain past due tax debts.

You may even be able to eliminate certain types of property loans, such as mortgages and car payments, though you will be required to surrender the collateral.

Debts That Cannot Be Discharged Through A Chapter 7 Bankruptcy

If you are facing the prospect of closing your business, be aware that you are not alone and having a small business fail is not uncommon. The Small Business Administration (SBA) reports that one in every 12 shuts the doors each year. This does not have to prevent you from moving on to bigger and better things or even opening up a new business in the future.

Dealing with outstanding debts from your former business can drag you down, though. Fortunately, bankruptcy can help in providing the fresh start you need. However, you do need to be aware that certain types of debts cannot be discharged through a Chapter 7 business bankruptcy. These include:

  • Alimony payments;
  • Child support;
  • Money owed on tax liens;
  • Legal judgments owed on personal injury or product liability claims.

Reach Out to Us Today

At the Law Office of Harry D. Lewis, we provide the trusted legal guidance you need when considering closing a small business. To discuss how bankruptcy can help you make a fresh start, contact our New York City business bankruptcy attorneys and request a free consultation today.

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