Chapter 7 is available to both individuals and businesses. It allows individuals to, among other things, assume or reject executory contracts and discharge most types of pre-petition debt, including but not limited to credit cards, utility bills, medical expenses, old income taxes, deficiencies, lines of credit, rejected contract obligations, personal loans, personal guarantees, condo or HOA dues, mortgages, and car loans. Although Chapter 7 is classified as a liquidation bankruptcy, generous exemption laws often permit debtors to retain all of their property.
For businesses, a Chapter 7 filing provides for a transparent and orderly wind-down. Upon the commencement of the case, the business entity ceases operations, the trustee takes control of all property of the estate, and proceeds to liquidate the assets.
Chapter 7 has no income-based eligibility restrictions for businesses. For individuals, however, there are income-related eligibility requirements. If an individual’s income is high enough that filing under Chapter 7 would be deemed an abuse of the bankruptcy process, the court may dismiss the case or convert it to a repayment plan under Chapter 13 or Chapter 11.
To assess whether an individual qualifies for Chapter 7, a threshold comparison must be made between the person’s current monthly income—as defined in the Bankruptcy Code—and the median income for a household of the same size in the same state. If the person’s income is below the applicable median, they automatically qualify for Chapter 7. If the income is above the median, however, the person must complete the “means test” to determine eligibility. The means test is a detailed formula that deducts allowed expenses from income. If, after completing the test, the individual has excessive monthly disposable income, then a presumption of abuse arises. Unless the individual can rebut that presumption, they will not be eligible to proceed under Chapter 7. That said, certain individuals are exempt from the means test, such as those with primarily non-consumer debts or qualifying disabled veterans.
In Chapter 7, only individual debtors are eligible to receive a discharge—businesses are not. Unless a creditor or other party in interest files an objection to discharge or a motion to extend the objection deadline, the court will typically issue the discharge order approximately 60 days after the initial meeting of creditors. For businesses, debts technically remain until applicable statutes of limitation run. However, once the trustee has liquidated the business assets, the debts effectively become uncollectible.