You can often keep your business if you file for bankruptcy, but the answer depends on two things: how your business is legally organized, and which chapter you file under. A sole proprietor filing Chapter 13 can usually keep operating and pay creditors over three to five years. The same owner filing Chapter 7 may lose business assets that don’t fit within exemptions. LLCs and corporations have their own options, including Chapter 11 and the newer Subchapter V, that let the business reorganize instead of shutting down. Choosing wrong can cost you the business; choosing well can save it.
Your Business Structure Decides What’s Actually at Risk
Bankruptcy treats a sole proprietorship and its owner as one person. There is no legal wall between your business checking account and your personal savings, or between the tools you work with and the furniture in your living room. Business debts are personal debts, and business assets are personal assets.1Forbes. Chapter 7 Bankruptcy For Sole Proprietors A personal bankruptcy sweeps everything into one case.
LLCs and corporations are separate legal entities. What you personally own is your membership units or shares, not the business’s equipment or inventory.2U.S. Small Business Administration. Choose a Business Structure If you file personal bankruptcy, the court looks at the value of that ownership interest. If the business itself files, the case targets the business’s own assets and debts. These are two different filings with very different outcomes, and you often have a choice between them.
Partnerships complicate things further. A general partnership can file as an entity, but that filing does not shield individual general partners from the partnership’s debts. The trustee can pursue general partners personally for any shortfall after partnership assets are gone, which often pushes partners into their own personal cases.
Personal Guarantees Follow You Home
Even if you set up an LLC or corporation specifically to protect yourself personally, personal guarantees can erase that protection. Lenders routinely require small business owners to personally guarantee loans, leases, and credit lines. If the business files bankruptcy, the business case does nothing to your personal guarantee obligation. Only individual debtors receive a discharge in Chapter 7. Corporations and LLCs do not.3Office of the Law Revision Counsel. 11 USC 727 – Discharge Wiping out a personal guarantee usually means filing your own personal case alongside any business filing.
Chapter 7: Fast, but the Business May Not Survive
Chapter 7 is liquidation. A court-appointed trustee gathers your non-exempt assets, sells them, and distributes the proceeds to creditors.4U.S. Courts. Chapter 7 Bankruptcy Basics There is no repayment plan. The case moves quickly, and most remaining eligible debts are discharged at the end.
Sole Proprietors
Whether a sole proprietor keeps the business after Chapter 7 comes down to exemptions. Federal law and most states let you protect certain categories of property up to specific dollar limits. Under the federal exemptions effective as of April 2025, you can protect up to $3,175 in tools, books, and equipment you use in your trade, up to $5,025 in a vehicle, and a wildcard worth $1,675 plus up to $15,800 of any unused homestead exemption.5Office of the Law Revision Counsel. 11 USC 522 – Exemptions Some states offer their own exemptions that may be more generous. You use one system or the other and cannot mix.
If your business assets fit within these limits, you can walk through Chapter 7 and keep operating on the other side. A freelance graphic designer whose main tools are a laptop and some software is in a different position from a contractor with $80,000 in heavy equipment. For asset-heavy sole proprietorships, Chapter 7 often ends the business.
LLC and Corporation Owners
If you personally file Chapter 7 and you own an LLC or corporation, the trustee treats your ownership interest as an asset. If it has value, the trustee can sell it to pay your creditors. In a single-member LLC, courts have broadly concluded that the trustee steps into the owner’s shoes and can control the LLC, including managing it and making decisions on its behalf. For multi-member LLCs the result is more nuanced and may depend on the operating agreement and state law, but the financial value of your interest is still exposed.
If the entity itself files Chapter 7, the outcome is blunt. The business is liquidated and ceases to exist. Corporations and LLCs do not receive a discharge.4U.S. Courts. Chapter 7 Bankruptcy Basics The trustee sells assets, distributes what’s available, and the entity winds down. Remaining debts technically survive, though there is usually nothing left to collect from.
The Means Test
Not everyone qualifies for Chapter 7. A formula called the means test compares your household income to the median income in your state. Below the median, you pass. Above the median, the court applies a more detailed calculation that subtracts certain allowed expenses, and if the remaining amount is high enough, the law presumes your filing is abusive and pushes you toward Chapter 13 or Chapter 11.6Office of the Law Revision Counsel. 11 USC 707 – Dismissal of a Case or Conversion Owners with healthy revenue and crushing debt often run into this wall.
Chapter 13: The Usual Path for Keeping a Sole Proprietorship Running
Chapter 13 is where most sole proprietors who want to keep their businesses end up. Instead of liquidating, you propose a repayment plan lasting three to five years.7United States Courts. Chapter 13 Bankruptcy Basics You keep everything, including the business and all its assets, and pay creditors from your ongoing income. For a business owner, that income is often what the business generates.
The plan has to satisfy the “best interests of creditors” test: every unsecured creditor must receive at least as much through your plan as they would have in a Chapter 7 liquidation.8Office of the Law Revision Counsel. 11 USC 1325 – Confirmation of Plan If you own expensive equipment that wouldn’t be exempt in Chapter 7, your monthly payments go up to compensate for the value creditors are forgoing. Finish the plan, and remaining eligible debts are discharged.
Chapter 13 has strict eligibility caps. As of April 2025, you can file only if your secured debts are below $1,580,125 and your unsecured debts are below $526,700.9Office of the Law Revision Counsel. 11 USC 109 – Who May Be a Debtor For sole proprietors, business and personal debts combine toward these totals. Over the limits, Chapter 11 is the alternative.
Chapter 11: Reorganizing the Business Itself
Chapter 11 is the heavy-duty reorganization option, available to any type of business entity including corporations, LLCs, partnerships, and individuals whose debts exceed Chapter 13 limits.10United States Courts. Chapter 11 – Bankruptcy Basics The business keeps operating while it develops a plan to restructure debts and pay creditors over time.
In most Chapter 11 cases, the business stays in control of its operations as a “debtor in possession,” keeping all the powers and duties of a trustee without one being appointed.11Office of the Law Revision Counsel. 11 USC 1107 – Rights, Powers, and Duties of Debtor in Possession You can continue signing contracts, paying employees, and serving customers while negotiating with creditors. With court approval, the business can even borrow new money to fund operations. A confirmed plan can renegotiate loan terms, reject burdensome contracts and leases, and reduce overall debt. When it fails, the case can be converted to Chapter 7 liquidation.
The problem is cost. Traditional Chapter 11 involves attorneys, accountants, quarterly fees to the U.S. Trustee, possible creditor committees with their own lawyers, and a process that can stretch well over a year. For a small business, those expenses alone can kill the reorganization effort.
Subchapter V: A Faster Path for Small Businesses
Congress created Subchapter V in 2019 because traditional Chapter 11 was too expensive and slow for most small businesses. It’s a streamlined version designed to get small business owners through reorganization faster and at lower cost.
To qualify, your total business debts (secured and unsecured combined, excluding debts owed to insiders or affiliates) must be below $3,424,000 as of the most recent adjustment. Subchapter V eliminates some of the most expensive features of standard Chapter 11: no creditor committee, no quarterly U.S. Trustee fees, and a compressed timeline. The court appoints a Subchapter V trustee whose main role is to help facilitate a workable plan rather than take over the business.
You stay in control throughout the case. If creditors accept the plan, you get a discharge on confirmation. Even if creditors reject it, you can still get the plan confirmed through a “cramdown” by committing your projected disposable income for three to five years, though a nonconsensual plan carries drawbacks including a delayed discharge and the trustee taking over payment distribution. For small businesses with viable operations but unsustainable debt, Subchapter V has become the usual choice since its introduction.
Matching the Chapter to Your Situation
A sole proprietor with modest business assets and debts under the Chapter 13 limits is almost always better off in Chapter 13, where the business keeps running and the debt gets restructured. If the assets are minimal and the means test allows it, Chapter 7 provides a faster fresh start, but the business survives only if every asset fits within your available exemptions.
LLC and corporation owners face a different question. If the business itself is viable but drowning in debt, a Chapter 11 or Subchapter V filing by the entity preserves operations while restructuring obligations. If the business isn’t salvageable, the entity can file Chapter 7 to wind down, but remember the entity gets no discharge and any personal guarantees you signed will follow you home. In that situation, you may need your own personal bankruptcy to clear the guarantee liability.
Timing matters more than most owners realize. Filing before assets are seized, before a key contract is terminated, or before cash reserves are drained gives you more options and more leverage with creditors. The protections bankruptcy offers work best when there is still something worth protecting on the other side.