In the United States, a chapter 7 bankruptcy, also known as a liquidation bankruptcy or straight bankruptcy, is when the debtor's nonexempt property is sold and the proceeds are distributed to creditors.
Chapter 7 of the US Bankruptcy Code allows for both business entities and individuals to file for liquidation bankruptcy.
As far as corporations are concerned, chapters 7 and 11 are the legal remedies for insolvency. Chapter 7 liquidates the business whereas chapter 11 restructures the business. There is also chapter 12 for some businesses but it’s only available to "family farmers" or "family fishermen".
Usually in a chapter 7 corporate bankruptcy, control of the company is handed to the bankruptcy trustee (an administrator appointed by the court). The trustee is responsible for determining whether it's in the best interests of the creditors to sell the business as a whole or the individual company assets.
There is no plan for repayment to be filed by the debtor, as in chapter 11 (reorganization) and chapter 13 (sole proprietors).
Businesses that are planning to file chapter 7 bankruptcy should expect to proceed through the following stages:
Under chapter 7, the steps are slightly different if you're a sole proprietor because you and your business are treated as one. So it’s possible to discharge the debt, which isn’t the case for partnerships and corporations.
Because a chapter 7 corporate bankruptcy is to liquidate the business and cease trading, employees are laid off. Any employees who are owed wages or benefits become creditors.
If you’re a sole proprietor, chapter 13 allows you to wipe out your personal liability for business debts. However, chapter 7 appeals to many small business owners as it doesn't require you to repay your debt to creditors.