Glossary · legal

Bankruptcy

Also called Chapter 7, Chapter 11, Subchapter V, insolvency filing.

A federal court process that halts collection and either liquidates a business or restructures its debts, with sharply different consequences for the company and for anyone who personally guaranteed its funding.

Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.

What it means

Chapter 7 liquidates: a trustee sells assets and distributes proceeds by statutory priority, and the business stops. Chapter 11 reorganizes, with the company continuing to operate while it proposes a plan. Subchapter V is a streamlined Chapter 11 for smaller businesses, cheaper and faster, with a debt ceiling that Congress has raised and allowed to lapse and that is periodically adjusted for inflation, so the current threshold should be checked rather than assumed.

Filing triggers the automatic stay under section 362 of the Bankruptcy Code. Collection stops, lawsuits pause, levies and garnishments halt, and a creditor that continues collecting can be sanctioned. Secured creditors keep their liens and can seek relief from the stay; unsecured creditors queue.

The personal guarantee is the part that surprises owners. The company's filing does not stay claims against a guarantor, so the funder can pursue the owner personally while the business case proceeds. A guarantor who needs protection has to file individually, and business-debt guarantees are generally dischargeable in that personal case unless the debt is excepted from discharge, for example for fraud or a materially false written statement about financial condition.

For cash advance funders, bankruptcy raises a structural question about their own product: whether purchased receivables are property of the estate, and how a claim founded on a purchase rather than a loan is treated.

Where this one catches people

Nearly every MCA contract lists filing for bankruptcy as an event of default. Such clauses are generally unenforceable in bankruptcy under the Code's restrictions on ipso facto provisions, and courts weighing whether an advance is really a disguised loan have treated a bankruptcy-default clause as evidence pointing that way, since a genuine purchaser of receivables accepts the risk of the seller's insolvency. The clause is written to deter filing, not because it survives one.

Where you will meet this term

Merchant Cash Advance Working Capital Term Loan SBA Loan Equipment Financing Invoice Financing

Read next

Automatic stayThe injunction that takes effect the instant a bankruptcy petition is filed, halting collection against the d… Charge-offAn accounting decision by the creditor to stop treating a balance as collectable, which changes the creditor'… CollectionsWhat a funder does to recover a defaulted balance, from internal calls and restructures through third-party a… Contract for the sale of future receivablesThe agreement behind a merchant cash advance, drafted as a sale of a fixed dollar amount of future receipts r… DefaultThe condition of having broken an agreement, by missing payments or by breaching any other promise in it, whi… Personal guarantee (PG)An individual's separate promise to pay the business's obligation out of personal assets, enforceable even af…

Bankruptcy — common questions

What does bankruptcy mean?

A federal court process that halts collection and either liquidates a business or restructures its debts, with sharply different consequences for the company and for anyone who personally guaranteed its funding.

Where does bankruptcy catch people out?

Nearly every MCA contract lists filing for bankruptcy as an event of default. Such clauses are generally unenforceable in bankruptcy under the Code's restrictions on ipso facto provisions, and courts weighing whether an advance is really a disguised loan have treated a bankruptcy-default clause as evidence pointing that way, since a genuine purchaser of receivables accepts the risk of the seller's insolvency. The clause is written to deter filing, not because it survives one.

Is bankruptcy the same as an interest rate?

Bankruptcy is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.

Which products does bankruptcy apply to?

Merchant Cash Advance, Working Capital, Term Loan, SBA Loan, Equipment Financing, Invoice Financing.

Is there a worked example of bankruptcy?

Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.

What else should I read alongside bankruptcy?

Automatic stay, Charge-off, Collections, Contract for the sale of future receivables, Default.

Has this definition been checked?

Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.

Is this legal advice?

No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.

Can I suggest a term?

Yes — [email protected]. The glossary grows from what people are actually shown in contracts.