Square One: What is Chapter 7 Bankruptcy?

chapter 7A bankruptcy filing under Chapter 7 of the US Bankruptcy Code could help you wind down your business and discharge certain types of unmanageable debt.

The US Bankruptcy Code offers relief to business debtors in a couple of ways. We talked earlier about a Chapter 11 filing which provides a period of collection relief in which a business owner can reorganize debt, operations, and pare away debt structure that is strangling ongoing business opportunities.

While many businesses have taken advantage of Chapter 11 reorganization during the pandemic, other companies, like Pier 1 Imports, are choosing to wind down business. For some of these companies, a profitable business model is just too far away under current economic circumstances and debt is crushing any viable bottom line.


While Chapter 11 is a good option for companies with the capability to work out asset division, profit, and debt with creditors, companies with no realistic means to move forward can use Chapter 7 to their advantage. Here are some points to consider about a Chapter 7 filing:

  • Chapter 7 is a process to assist a company liquidate and wind-down its business.
  • Just like Chapter 11, a bankruptcy trustee is appointed to work to sell, or divest assets in a way most profitable to investors and creditors in the company.
  • Creditors in a Chapter 7 bankruptcy may ultimately receive pennies on the dollar depending on the type of debt they are holding. Secured creditors who have collateral backing their loan are in better shape as the collateral, like business equipment, will be sold or repossessed to pay the debt.
  • Investors in the company may take more or less. Those who hold bonds may see the return of their investment, stockholders much less so. Unsecured creditors are at the end of the line, followed by a business owner.


Our tax attorneys work with business owners considering both Chapter 7 and Chapter 11 bankruptcies. The provisions of both have their benefits for the unique debt and business structure of any company.


Under the Tax Code, there are limited types of taxes that can be discharged in a bankruptcy. In Chapter 7, income taxes may be dischargeable under certain conditions. Those conditions preclude tax fraud, or filing of a fraudulent tax return. Proper filing of income tax returns in the years leading up to a bankruptcy filing are critical for discharging some kinds of debt.


Federal tax refunds are subject to review by the Chapter 7 bankruptcy trustee and ultimate discharge of tax debt depends on the facts and circumstances of each filing.


Chapter 7 can be an important tool to relieve the burden of business debt in a commercial interest that cannot find a solid path forward. If you are struggling with overwhelming business debt, speak with an experienced tax lawyer for guidance on options for relief.


Speak with experienced tax attorneys when you have questions about an IRS audit or other tax controversy

From offices in Chicago and Cleveland, our legal team at Robert J. Fedor, Esq., LLC works with businesses and clients locally and abroad who are considering business bankruptcy or are challenged with a tax controversy, offshore tax question, or facing an IRS audit. Call 800-579-0997 or contact us when you need strong, straightforward representation and business guidance.


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