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Can Chapter 7 eliminate judgments for business debt?

When a business venture fails in Washington, it is not uncommon for the business owner to be thrown into financial turmoil. Filing for Chapter 7 bankruptcy is one way to help climb from under a crushing debt load. However, it is important to understand how bankruptcy impacts existing business debt, including judgments.

In general, personal guarantees of most business debts can be discharged during personal bankruptcy. However, doing so requires that a third party trustee examines the totality of the debtor's assets. The trustee will be looking for assets that have equity, such as a home, real estate or certain items of property. If those assets can be liquidated, then the profits will be distributed among creditors as part of the bankruptcy process.

So, in cases where the debtor does not own assets that have significant equity, then Chapter 7 bankruptcy may be the best course of action. A successful bankruptcy action could eliminate personal liability for business debts. That would leave the debtor with something of a "clean slate" when it comes to debt tied to judgments.

There are a number of rules related to Chapter 7 bankruptcies. Individuals who file must meet certain income guidelines. In addition, it is important to ensure that there were no acts taken during the process of obtaining loans or lines of credit that could be construed as fraudulent. If a debt is found to be in place based on an act of fraud, then it could be deemed ineligible for discharge. For Washington residents who have questions about how bankruptcy will affect their business debt, scheduling an initial consultation with a bankruptcy attorney can provide answers and clarity.    

Source:, "Preparing for personal bankruptcy", Karin Price Mueller, March 7, 2017

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