How to File for Chapter 7 Bankruptcy After a Failed Startup

When people look at startup success, they seldom romanticize the journey of entrepreneurs. However, in reality, most startups hardly survive upto five years. Hence, the number of business owners who file for bankruptcy is really high.

In general, if you have a huge business debt and multiple obstacles and are not finding a way out of them, the best decision is to file for Chapter 7 bankruptcy. Basically, Chapter 7 bankruptcy helps you hit the reset button.

Moreover, it wipes out some of your burdens. Also, it gives you the option to have a clean start. Therefore, you must get an idea of how to file for Chapter 7 bankruptcy if your startup failed.

How to File for Chapter 7 Bankruptcy? – Steps to Follow

If you want to know how to file for Chapter 7 bankruptcy, the following are the steps you need to follow:

1. Get a General Idea About Chapter 7 Bankruptcy

Before you think of filing for Chapter 7 bankruptcy, you must have a good idea of:

• What does it involve?
• How does it work?
• How will it help you?

Primarily, Chapter 7 allows individuals and businesses to reduce their unsecured debts. These debts generally include personal loans, credit card bills, and other types of business debts. 

The goal of this provision is to offer you a fresh start. Hence, it is also known as “liquidation bankruptcy.” In addition to that, you might also choose to sell some of your business assets to clear debts and repay your creditors.

However, your creditors are not able to seize all your assets. In general, you will be able to protect important properties like your home, car, and retirement accounts with the help of exemptions. 

Apart from that, each state comes with specific rules about exemptions. Therefore, you will need to get a better understanding of the bankruptcy laws of where you live.

Meanwhile, a typical bankruptcy myth among entrepreneurs is that if you file for bankruptcy, you will lose everything you have (your personal assets, too). But in reality, Chapter 7 bankruptcy offers you protection for your essential properties.

In addition to that, if your business falls under a legal entity (LLC or Corporation), you will still be able to file for bankruptcy for the business. Also, it will not have any impact on your personal assets.

2. Assess Your Eligibility

Once you understand the basics of Chapter 7 bankruptcy, you will then have to find out whether you are eligible or not. Apart from that, the government also uses a “means test” with the help of which they evaluate your income and expenses to check your eligibility.

To qualify, your income must be below your state’s median income. If it is, you automatically qualify for Chapter 7. However, if your income exceeds the median, you must evaluate your disposable income. Actually, your disposable income is the amount left after you spend your necessary living expenses.

In addition to that, this means test will also check whether you have enough disposable income to repay your debts through Chapter 13 bankruptcy. Thereby, if you have enough income to repay debts, you will not be able to qualify for Chapter 7.

Moreover, when it comes to debt, check whether it is your personal debt or business debt. If you run a sole proprietorship, you will have to pay the startup’s debts. This will be present in your Chapter 7 filing.

Meanwhile, if your business is a separate legal entity (LLC or corporation), you will be able to file for business bankruptcy. Also, you will be able to keep your personal finances separate. Furthermore, personal liability will still apply to this case if you offer a personal guarantee to any of your business debts.

3. Gather Your Financial Information

Once you are eligible for Chapter 7 bankruptcy, you will need to:

1. Gather all the documents required for your bankruptcy filing
2. Provide a clear picture of your finances
   • Assets
   • Liabilities
   • Income, and 
   • Expenses.

Apart from that, you will also need to give details of:

• A list of creditors: List everyone you owe money to, from credit card companies to vendors and personal loans related to your startup.
• Recent tax returns: These help the court assess your financial situation.
• Information about your assets: You might include personal assets. In general, personal assets are your home, car, and bank accounts. Also, you will be able to include your business assets, like equipment, inventory, and receivables.
• Monthly income and expense statements: This includes proof of your earnings and your monthly expenses.

Being is crucial here. In fact, the more thorough and accurate you create your documentation, the smoother your filing process will become.

4. Reach Out to a Bankruptcy Attorney

It is possible to file a Chapter 7 bankruptcy on your own (a “pro se” filing). However, if you hire a bankruptcy attorney, the expert will be able to effectively guide you through the filing process. 

Apart from that, the lawyer will also ensure that you are filing your bankruptcy situation correctly. Also, they will check whether you are protecting your assets as much as you are supposed to do.

In addition to that, a bankruptcy attorney will also help you get past the complicated parts of this legal process. These include exemptions, debts that may not be dischargeable (like certain taxes or student loans), and the means test. 

Moreover, they will also represent you in front of the bankruptcy court. Furthermore, they will handle all communication with your creditors.

5. Complete Your Bankruptcy Petition

Once you have all your information and an attorney on board, you will have to file your bankruptcy petition with the court. The following are the major aspects of a bankruptcy petition that you must know about:

• The bankruptcy petition includes detailed bankruptcy forms. In general, these forms outline your assets, liabilities, income, and financial history.
• You must maintain honesty and thoroughness in this process. This is because errors and omissions will lead to a delay in your situation. In some cases, the court might even dismiss your case.

In your petition, you must also list the following:

• your creditors
• the debts you want to discharge, and 
• any property you are trying to keep. 

Apart from that, you will also get the chance to list any exempt property you wish to protect from liquidation. Also, your case will be assigned to a bankruptcy trustee after you file for bankruptcy.

6. Attend the Meeting of Creditors

After you submit your petition, you will have to attend a meeting of creditors. This is also called 341 hearing. In general, when the meeting starts, the bankruptcy trustee asks you questions about your financial situation.

Apart from that, creditors might also attend and ask questions. However, this is not very common. Primarily, the purpose of this meeting is to verify the accuracy of the information you provided. Also, it ensures that you do not miss crucial details.

During the meeting, you will also have to provide your attorney with any more documents that the trustee requests. This might include bank statements, asset evaluations, or other supporting materials.

7. Asset Liquidation

In Chapter 7 bankruptcy, the trustee might choose to liquidate your non-exempt assets to pay off your creditors. In general, many individuals are able to keep most of their personal property due to state exemptions. However, some of your assets might be at risk.

Apart from that, if the trustee determines that you have non-exempt assets, they might sell those assets. In addition to that, the authorities might also use your bankruptcy proceedings to pay your creditors. 

However, most Chapter 7 cases are “no asset” cases. This means that the debtor has no non-exempt property and hence, no liquidation happens.

8. Discharge Your Debts

The court will issue a discharge order after the liquidation process is complete. However, you will still have to follow the necessary procedures. This order eliminates most of your debts. In general, these include your personal and business debts. Hence, you get a fresh financial start.

However, certain debts, such as student loans, child support, alimony, and some tax debts, can’t be discharged through Chapter 7. Typically, it takes three to six months from the time of your filing until you receive your discharge.

9. Rebuild Your Financial Life

While bankruptcy stays on your credit report for 10 years, you will be able to rebuild your credit immediately. These are the things you must do:

1. Start by applying for a credit card or a credit-builder loan. 
2. As you move forward, acquire the habit of paying bills on time.
3. Always keep your debt levels low. This will help you to gradually improve your credit score.

Apart from that, you will learn valuable lessons as you go through the bankruptcy process. One of the things you will learn is that it is vital to avoid taking on personal guarantees for business debts in the future. 

Also, you must try to set up an LLC or corporation to separate your personal and business finances. This will help you to protect your personal assets.

In fact, many entrepreneurs find success after bankruptcy. Basically, you will require the right mindset. Then, your experience will serve as your stepping stone toward a stronger financial future. This way, you will be able to apply the lessons learned and build a more secure path ahead.

Start Filing Now

Now you know how to file for Chapter 7 bankruptcy. Basically, filing for Chapter 7 bankruptcy after a failed startup might feel like the end of the road. However, it is really just the beginning of your recovery. With the above steps, you can discharge your debts and regain control of your financial future. 

While it’s a difficult decision, it can be necessary for those looking to move forward after a business setback. Remember, a fresh start is within reach. All you need to do is just take the first step.