Summary:
Chapter 7 bankruptcy shuts everything down—immediately and permanently. Market rebounds won’t help once it’s filed, and personal guarantees (like on a commercial lease) can follow you long after the business is gone. Online sellers may avoid rent, but supplier debt can still haunt them. Trustees prioritize secured creditors, leaving most foreign suppliers out of luck.
When a business files for Chapter 7, it’s hitting the “STOP” button. Everything freezes. Operations halt. Accounts lock. Any chance to recover, pivot, or react to the market? Gone. It doesn’t matter if the economy flips in your favor the day after you file.
That’s the first and biggest myth worth shattering: Chapter 7 isn’t about bouncing back. It’s about cutting losses and closing doors. So, if you’re thinking about using it to duck a rough patch and re-emerge stronger, this option probably isn’t for you. The court isn’t in the business of giving you a reboot. It’s in the business of paying back creditors, even if it’s just pennies.
Personal Guarantees Could Be Ghosts That Follow You
If your business has a physical storefront, you probably signed a personal guarantee on your lease. That contract is binding—possibly long-term. When your business dissolves, those obligations don’t vanish.
Your LLC might be dead, but your lease lives on. Commercial landlords can and will come after your personal assets. Online retailers have fewer anchors (no rent, no utilities), but that doesn’t mean they’re off the hook.
Online Sellers: Same Risks, New Shape
Running a business through Amazon or Shopify seems lightweight without rental fees, but your exposure shifts to your supply chain. For most online sellers, the biggest creditors aren’t always banks or landlords; they’re often suppliers.
Many of those suppliers are overseas, particularly in China. In the race to move inventory, manufacturers often take leaps of faith. They’ll ship product with little to no payment upfront, especially if they’re sitting on massive stockpiles. This may seem like generosity, but it’s strategy. They bet on volume, repeat business, and an eventual payday.
However, if your business folds mid-cycle, they’re out of luck. They shipped the goods, you couldn’t sell them, and now they’re chasing a U.S. bankruptcy trustee with a clipboard and a long line of other unpaid creditors.
Suppliers Take the Hit—and Know It
Manufacturing in China is brutally competitive. Oversupply is constant. That pressure creates urgency and risk tolerance. Factories move product just to clear space, hoping for long-term returns.
When tariffs spike or platforms freeze your storefront, that bet turns bad fast. The result? Suppliers get stuck with unpaid invoices and no leverage.
Trustees Don’t Play Favorites, But They Do Prioritize
Once bankruptcy is filed, the trustee steps in to liquidate. Secured creditors go first. Suppliers, especially foreign ones, go last. There’s no workaround.
For Chinese manufacturers, this means they’re left hoping for a payout from a system that doesn’t prioritize them. Some hedge with trade credit insurance or start demanding payment upfront, especially from small or first-time U.S. buyers. Others buy trade insurance or keep rolling the dice.
Bottom Line
Chapter 7 is a liquidation drill. You can’t hedge your bets once it’s triggered. If you’re thinking about filing, assess what you’ve personally guaranteed. If you’re online-only, don’t assume you’re safe. Supplier debt is real, and suppliers are often betting on you with more risk than you think.
If you’ve got foreign suppliers, especially in China, remember: they’ll be counting on a U.S. trustee who isn’t exactly in a rush to make them whole.
Talk to Sapiens Law Before You Hit that Button
Before making a move that shuts everything down, get clear on what you’re really stepping into. We help businesses make smart calls before it’s too late. Reach out to Sapiens Law. We’re business-friendly, globally minded, and ready when you are.
