Filing bankruptcy and keeping your business open is possible in many cases, but the outcome turns on two things: how your business is legally organized, and which chapter you file under. A sole proprietor and an LLC owner face very different risks, and the choice among Chapter 7, Chapter 13, and Subchapter V of Chapter 11 often decides whether you liquidate or keep operating.
Why Your Business Structure Decides What’s at Risk
If you run a sole proprietorship, the law treats you and the business as one person. Your equipment, inventory, receivables, and the cash in your business account all become part of your bankruptcy estate the moment you file.1Office of the Law Revision Counsel. 11 USC 541 – Property of the Estate A trustee can potentially sell any of it to pay creditors, unless a specific exemption protects the item.
Corporations and LLCs work differently. The entity is a separate legal person, so you don’t directly own the business assets. What enters your bankruptcy estate is your stock or membership interest. The business itself keeps its property and can keep operating as a separate legal entity while you go through personal bankruptcy.2United States Courts. Chapter 11 – Bankruptcy Basics
That protection isn’t absolute. The trustee will value your ownership interest, and if it’s worth real money the trustee can sell it. A buyer stepping into your ownership position could take over the company. So the business survives either way, but your role in it may not. For multi-member LLCs, the operating agreement often controls what happens when a member files, and courts split on whether provisions stripping a filer’s management rights hold up against federal bankruptcy law.
Chapter 7: Liquidation That Sometimes Leaves the Business Standing
Chapter 7 is the fastest form of bankruptcy, but it’s built around selling non-exempt property. A court-appointed trustee takes control of your assets, converts them to cash, and pays creditors.3Office of the Law Revision Counsel. 11 USC 704 – Duties of Trustee For a sole proprietor with valuable equipment or inventory, that can mean the business closes and the assets get sold.
But Chapter 7 doesn’t kill every business. If the business owes more than its assets are worth, the trustee may abandon it as not worth liquidating. Service businesses often survive because the real value is your expertise, not physical property. A freelance consultant, graphic designer, or repair technician with a few tools and a client list frequently walks through Chapter 7 with their livelihood intact.
If you own an LLC or corporation, a personal Chapter 7 filing doesn’t directly reach the entity’s assets. The trustee gets your ownership interest, and if that interest has little market value because the business is struggling, the trustee may abandon it. The business keeps running and you keep running it. This is one of the clearest reasons to hold your business inside a separate legal entity before trouble hits.
Chapter 13: Repay Over Time and Keep Everything
Chapter 13 lets you keep all your property, business assets included, in exchange for a repayment plan lasting three to five years.4United States Courts. Chapter 13 – Bankruptcy Basics You pay a portion of your debt from future income while continuing to operate. No trustee shows up to sell your equipment.
Self-employed people and sole proprietors are explicitly eligible, but debt ceilings apply. Unsecured debts cannot exceed $526,700 and secured debts cannot exceed $1,580,125.4United States Courts. Chapter 13 – Bankruptcy Basics For a business owner with a commercial mortgage or heavy equipment loans, those caps can be a real constraint. If your debts run higher, Chapter 13 isn’t available and you’ll need to look at Chapter 11.
Plan length depends on your income compared with your state’s median. Below the median, three years is the minimum. Above it, five. The court expects disposable income to fund the plan, which can squeeze cash flow at a business that’s already tight. Build a realistic operating budget before you file.
Subchapter V: Reorganization Sized for Small Businesses
Subchapter V of Chapter 11 was designed for small business owners who need to restructure debt without the crushing cost of a traditional Chapter 11 case. A trustee is appointed, but the role is to help negotiate a workable plan rather than take over the business or sell it off.5Office of the Law Revision Counsel. 11 USC 1183 – Trustee You stay in charge of daily operations throughout.
Eligibility hinges on the debt limit. After a temporary increase to $7.5 million expired in June 2024, the cap dropped back to about $3,024,725. Legislation to restore the higher limit was introduced in the Senate in early 2026 but has not been enacted.6Congress.gov. S.3977 – Bankruptcy Threshold Adjustment Act of 2026 If your total debts fall within the current cap and at least half comes from business activities, Subchapter V is likely the best route for keeping the business running while restructuring what you owe.
Compared with traditional Chapter 11, Subchapter V moves faster, costs less, and doesn’t require creditors to vote on the plan. You propose a plan committing projected disposable income over three to five years, and the court can confirm it as fair and feasible even without creditor consent. The filing fee matches any Chapter 11 case at $1,738, but attorney costs run significantly lower because the process is less complex.
Exemptions That Shield Business Property
Exemptions are what keep certain property away from the trustee. They matter most in Chapter 7, where anything non-exempt can be sold. In Chapter 13, they determine how much you must pay unsecured creditors through your plan.
The federal tools-of-the-trade exemption protects up to $3,175 of equipment and tools you need for your profession.7Office of the Law Revision Counsel. 11 USC 522 – Exemptions That covers modest gear but won’t stretch far around expensive machinery or a large inventory. Many states offer their own exemption schemes that may be more or less generous, so what’s protected depends on where you file.
The federal wildcard exemption adds flexibility. It covers $1,675 of any property you pick, plus up to $15,800 of unused homestead exemption.7Office of the Law Revision Counsel. 11 USC 522 – Exemptions A renter with no home equity can effectively use $17,475 of wildcard, enough to shield meaningful business property. Stacking tools-of-the-trade with the wildcard often protects a real chunk of a small business.
When a business carries more debt than its assets are worth, exemptions matter less. A trustee usually won’t bother selling property that would net nothing after paying off secured loans, and will abandon their interest in the business entirely. That happens more often than owners expect.
Personal Guarantees on Business Loans
This is where many entity owners get tripped up. Even when your LLC or corporation carries its own debts, lenders almost always require the owner to personally guarantee the loan. The guarantee puts you on the hook individually if the business can’t pay. If the business files its own bankruptcy or simply closes, the lender can still come after your personal assets to collect on the guarantee.
A personal bankruptcy filing can discharge your liability under a personal guarantee in most cases. Chapter 7 wipes out the debt entirely if it qualifies. Chapter 13 treats it as an unsecured claim that gets paid through your plan, with any remaining balance discharged at the end. When both you and the business are insolvent, you may need to file both a personal and a business bankruptcy to fully resolve things.
The point to hold onto: filing bankruptcy only for the business entity does not eliminate your personal guarantee. Only a personal filing addresses that. Tell your attorney about every guarantee you’ve signed before settling on a strategy.
Contracts, Leases, and Immediate Protection From Creditors
Many commercial leases and supplier contracts include clauses letting the other party walk if you file bankruptcy. Federal law overrides them. A contract or lease cannot be canceled solely because you filed, became insolvent, or had a trustee appointed.8Office of the Law Revision Counsel. 11 USC 365 – Executory Contracts and Unexpired Leases For a business tied to a specific location or ongoing supply relationships, that protection is essential.
It has limits. In a reorganization under Chapter 13 or Subchapter V, you can assume a contract by curing any default and providing adequate assurance you’ll perform going forward. You can also reject contracts that are too burdensome, which converts the other side’s claim into unsecured debt in your case. Choosing which contracts to keep and which to shed is one of the most valuable tools in business bankruptcy. Contracts fundamentally tied to your individual performance may be an exception, but standard commercial leases, equipment financing, and vendor agreements can’t be terminated over the filing itself.
The filing itself triggers the automatic stay, a court order that stops nearly all collection activity against you and your property.9Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay Creditors cannot repossess equipment, garnish accounts, file new lawsuits over pre-filing debts, or shut off services to force payment. For a business on the brink, that breathing room can be the difference between collapse and survival. Secured creditors can ask the court to lift the stay if their collateral is losing value or you’re not making adequate protection payments, and if a prior case was dismissed within the past year the stay may be limited to 30 days or not apply at all. For a first-time filing, the stay gives you immediate space to plan.
Filing fees run $338 for Chapter 7, $313 for Chapter 13, and $1,738 for Chapter 11, including Subchapter V.10United States Courts. Bankruptcy Court Miscellaneous Fee Schedule Chapter 13 filers who cannot pay upfront may request installments. Attorney fees are separate and vary with case complexity and chapter.
The Payroll Tax Trap
Debt discharged in bankruptcy generally is not taxable income to you. Debt canceled in a Title 11 case is excluded from gross income under federal tax law.11Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness You claim the exclusion on Form 982 for the year of discharge, and the trade-off is reducing certain tax attributes like net operating loss carryovers by the excluded amount.12Internal Revenue Service. Publication 4681 – Canceled Debts, Foreclosures, Repossessions, and Abandonments
Payroll taxes are the exception that catches business owners. If you have employees and fell behind on withholdings, those trust fund taxes are not dischargeable in any chapter.13Office of the Law Revision Counsel. 11 USC 523 – Exceptions to Discharge The IRS treats withheld income taxes and the employee share of Social Security and Medicare as money you held in trust for the government. If you didn’t turn it over, you can be personally liable through the trust fund recovery penalty.14Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax That penalty survives bankruptcy. The employer matching share is treated differently and may be dischargeable, but the withheld employee portion is not going away.
Your Professional License Is Safe
Owners in licensed trades often worry that bankruptcy will cost them the credential they need to earn a living. Federal law addresses this directly. A government agency cannot revoke, suspend, or refuse to renew a license, permit, or franchise solely because you filed bankruptcy or failed to pay a debt that was discharged.15Office of the Law Revision Counsel. 11 USC 525 – Protection Against Discriminatory Treatment
The word “solely” does the work. A licensing board can still evaluate your overall fitness to practice, including financial responsibility, as long as it doesn’t single out the bankruptcy filing itself. In practice, boards rarely revoke credentials over a bankruptcy. The protection reaches state bar associations, medical boards, contractor licensing authorities, and similar bodies. If you hold a professional license, filing puts it at far less risk than most owners fear.