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What Happens to Business Assets in Chapter 7 Bankruptcy

Chapter 7 bankruptcy is often a fresh start for debtors.  The debtor lists all of his/her business debts in a bankruptcy proceeding petition and submits them to the bankruptcy court.  A typical Chapter 7 debtor is provided with a fresh start in which lot of the business debts are eliminated.

Chapter 7 is ideal  for a debtor who doesn’t need significant real assets and at the same time has a large  number unsecured debts.  Unsecured debts are debts that are not guaranteed by any real property or assets.  In general, credit cards, outstanding medical bills, personal loans, utilities, automotive financial deficiencies and rental deficiencies are treated as unsecured debts of a small business.  Since there is no collateral attached to these types of assets, Chapter 7 bankruptcy proceedings can easily eliminate these debts.

Debts that guaranteed by any real property or assets are known as secured assets and treatment of such debts is different in Chapter 7 bankruptcy proceedings.  Secured debts are generally supported with real property such as houses or motor vehicles and those debts should be paid in full if the debtor wants to retain these collateral properties.

There are several options to settle a secured debt in Chapter 7 bankruptcy proceedings. The options are:

  • The debtor can continue the contracted payment regularly jut as before the bankruptcy proceedings until full settlement.  This process is known as reaffirming a debt.
  • The debtor can surrender the guaranteed real property or assets to eliminate the secured debts in full.
  • The debtor can redeem the property secured with the creditor by making a lump sum payment for the market value of it.
  • The debtor can choose the voluntary payments on the secured property to release it from the creditor.  This option is not exist in all states because of the purchase money security interests.

In a Chapter 7 bankruptcy, the debtor can exempt certain real property up to a certain value.  This ceiling varies states to states and some states follow the federal bankruptcy exceptions.  If a business asset falls within the applicable exemption, the debtor can claim it as an exempted property and retain the real property.  There are some general types of exemptions that protect the business assets of a debtor. They are:

  • Tools of the trade: If the debtor’s trade requires specialized tools, the federal bankruptcy exceptions and certain state bankruptcy laws permits to retain such tools of the trade with the debtor.  Usually, in certain circumstances an appraisal is conducted to determine the cost of such tools and professional equipments or books.  Moreover, certain states provide higher exemption above the federal exemption amount.
  • Wildcard exemption:  Most exemptions in Chapter 7 bankruptcy are specific to a type of real property and that can only be used to protect such category assets.  However, the wildcard exemption allows the debtor to exempt any type of real property in business.


Inside What Happens to Business Assets in Chapter 7 Bankruptcy