Chapter 7 bankruptcy for sole proprietors is  different than bankruptcy for an incorporated small business or a personal bankruptcy.  Sole proprietorship is an unincorporated business structure  which lacks a separate legal entity.  From a legal perspective, a sole proprietor and the sole proprietorship are treated as one.  In other words, the sole proprietorship business is not a separate legal entity apart from its owner.  The business debt of a sole proprietorship is treated as a personal liability of that business owner.  In Chapter 7 bankruptcy process, the business owner can wipe out both his/her personal and business debts.

The business debts of a sole proprietorship are personal debts of the sole proprietor.  If there is a default, the creditors can claim on the business assets and personal assets of the sole proprietor.  In Chapter 7 liquidation proceedings, the sole proprietor can wipe out all his/her business debts and personal debts by bankruptcy discharge.  However, bankruptcy code exempted 19 categories of debt that cannot be discharged.

In a sole proprietorship business, all business assets are treated as the personal assets of the sole proprietor.  In a Chapter 7 bankruptcy proceeding, all such business assets and personal assets are listed for liquidation.  In general, business assets include all tools, equipments and machinery in use, and account receivables and the list of these items should be submitted to the bankruptcy trustee for liquidation.  However, the sole proprietor can exercise the specific exemption option to exclude certain assets.  All business income of a sole proprietorship is treated as the income of the business owner.  The sole proprietor should disclose his/her net income by deducting the business expenses from gross income to the bankruptcy trustee with all supporting documents.

The volume of business debt is an important factor in deciding Chapter 7 bankruptcy.   If the sole proprietor has any substantial assets, Chapter 7 is a good option for him/her.  If the sole proprietor has enough assets to settle the business debts s/he can file for the Chapter 13 reorganization.  In general, Chapter 7 bankruptcy means that the sole proprietorship business is over.  In Chapter 7 liquidation process, a bankruptcy trustee is appointed by the court to disburse the claims of creditors from the assets of the sole proprietor.  After the settlement of all claims, the sole proprietor receives a discharge from the bankruptcy trustee.