Yes, you can file bankruptcy for a business, and every business structure is eligible — but the chapter you use, whether your personal assets are exposed, and whether any debt actually gets wiped out depend on how the business is organized and how much it owes. A sole proprietorship files through the owner’s personal bankruptcy because the law treats the two as one. Corporations, LLCs, and partnerships file in the business’s own name. And one assumption trips up owners more than any other: a Chapter 7 liquidation does not discharge the remaining debts of a corporation, LLC, or partnership the way it does for individuals.
How Your Business Structure Changes the Case
A sole proprietorship has no separate legal identity, so the court handles the owner and the business as a single debtor. Personal bank accounts, the owner’s house, and business equipment all go into the same pot. Business debts and personal debts get addressed together.
Corporations, LLCs, and partnerships are different. These entities have their own legal identity and can file for bankruptcy without pulling the owner’s personal finances into the case. If your LLC files Chapter 7, the trustee sells the LLC’s assets, not yours. That separation is the reason for forming a separate entity in the first place, though personal guarantees can punch a hole in that wall.
Chapter 7: Liquidation
Chapter 7 shuts the business down. A court-appointed trustee takes control of the assets and sells everything of value — equipment, inventory, accounts receivable, intellectual property, real estate — and distributes the proceeds to creditors. This is the route for a business with no realistic path back to profitability.
Here is the part that surprises many owners: corporations, LLCs, and partnerships do not receive a discharge in Chapter 7. Federal law limits the Chapter 7 discharge to individual debtors.1Office of the Law Revision Counsel. 11 USC 727 – Discharge If your corporation has $500,000 in debts and the liquidation yields $200,000, the remaining $300,000 is not formally forgiven. In practice this rarely matters, because the entity ceases to exist and there is nothing left to collect from. It does matter for general partnerships where partners share liability, and it matters if assets surface later.
Sole proprietors filing Chapter 7 do receive a personal discharge because they are filing as individuals. The tradeoff is that personal assets go into the case alongside business property, subject to state and federal exemptions covering things like a primary residence and retirement accounts.
Chapter 11 and Subchapter V: Reorganization
Chapter 11 keeps the business operating while it restructures under court supervision. The company proposes a reorganization plan — renegotiating contracts, reducing balances owed to certain creditors, stretching payments over time — and creditors vote before the court decides whether to confirm it.
Traditional Chapter 11 is expensive and slow, which is why Congress created Subchapter V for smaller businesses. Subchapter V eliminates the creditors’ committee unless the court specifically orders one, skips the detailed disclosure statement that traditional Chapter 11 requires, forces the debtor to file a plan within 90 days, and lets the court confirm a plan without every creditor class agreeing. There is no absolute priority rule wiping out equity holders before unsecured creditors take a cut, and the quarterly U.S. Trustee fees that burden traditional Chapter 11 cases do not apply.2United States Bankruptcy Court for the Middle District of Tennessee. Top 15 Features of Subchapter V
Eligibility turns on debt. The temporary $7.5 million limit Congress set during the pandemic expired in June 2024, and the threshold reverted to roughly $3 million (adjusted periodically for inflation). At least half the debt must come from business activity.
Chapter 13 for Sole Proprietors, Chapter 12 for Farmers and Fishermen
Chapter 13 is available to sole proprietors and other individual filers who want to keep business assets while paying down debts over three to five years. For cases filed between April 1, 2025, and March 31, 2028, secured debts cannot exceed $1,580,125 and unsecured debts cannot exceed $526,700. Business debts above those ceilings push you into Chapter 11.
Chapter 12 is a streamlined reorganization built specifically for family farmers and commercial fishermen with regular annual income, with more generous debt limits than Chapter 13. It is not available to businesses outside those two categories.
Personal Guarantees and What Follows You Home
This is where owners get blindsided. The business files, the case addresses the entity’s debts, and then the bank calls the owner personally. If you signed a personal guarantee on a business loan or line of credit, the business’s bankruptcy does not release you. Federal law is explicit: discharging the debtor’s debt has no effect on the liability of any other person for the same debt.3Office of the Law Revision Counsel. 11 USC 524 – Effect of Discharge
The automatic stay that protects the business does not automatically extend to guarantors. Chapter 11 has no statutory co-debtor stay. A court might extend protection in unusual circumstances, such as when pursuing the guarantor would deplete the estate, but the guarantee alone is not enough.
For LLC and corporate owners who did not sign personal guarantees, the business bankruptcy generally stays off personal credit and personal assets stay untouched. Two common exceptions break that protection: personal guarantees on credit accounts, and responsibility for trust fund taxes such as employee withholdings the business failed to remit. Both can follow the owner regardless of the entity’s filing.
Tax Treatment of Discharged Debt
Outside bankruptcy, forgiven debt is generally taxable income. A business that negotiates a $100,000 debt down to $40,000 would normally owe income tax on the $60,000 difference, which catches many owners off guard during informal workouts.
Bankruptcy provides a significant exception. Debt discharged in a Title 11 case is excluded from gross income entirely.4Office of the Law Revision Counsel. 26 USC 108 – Income from Discharge of Indebtedness A separate exclusion exists for insolvency outside bankruptcy, but the bankruptcy exclusion is broader and does not require proving insolvency. The tradeoff is that certain tax attributes, such as net operating loss and tax credit carryforwards, may need to be reduced by the amount excluded.5Internal Revenue Service. Publication 4681 – Canceled Debts, Foreclosures, Repossessions, and Abandonments For sole proprietors, canceled business debt that does not qualify for an exclusion is reported as ordinary income on Schedule C.
What You Need to File and What It Costs
A business petition demands a full financial picture. You will need a complete inventory of assets (physical property, equipment, real estate, accounts receivable, intellectual property), a full list of creditors with amounts and collateral, current income and expense statements, a statement of financial affairs covering recent transactions and payments to insiders, tax returns going back two to three years, and every active contract or lease. Missing documents or sloppy records are the fastest way to lose credibility with the court.
Form B 201 is the voluntary petition for non-individual debtors — corporations, LLCs, and partnerships. Form B 101 covers individuals, including sole proprietors.6United States Courts. Bankruptcy Forms Filing fees are $338 for Chapter 7 and $1,738 for Chapter 11.7United States Courts. Bankruptcy Court Miscellaneous Fee Schedule Attorney fees run considerably higher, and Chapter 11 is the more expensive engagement because of the plan work involved. Every figure on the schedules should match your internal records; discrepancies invite accusations of fraud or outright dismissal.
Payments the Trustee Can Undo
Before you file, know that the trustee will look backward. A trustee can claw back payments to creditors made before filing if those payments gave the creditor more than it would have received in a straight liquidation. The look-back is 90 days for ordinary creditors and a full year for insiders such as owners, family members, or affiliated companies.8Office of the Law Revision Counsel. 11 USC 547 – Preferences
Paying off a relative’s loan or accelerating payments to a favored vendor in the months before filing can backfire; the trustee can sue to recover those funds and redistribute them. Selective payments and asset transfers during this window become ammunition against the debtor.
What Happens After You File
The moment the petition hits the docket, the automatic stay takes effect. This freezes almost all collection activity, lawsuits, and foreclosure proceedings against the business, and creditors who violate it can face sanctions.9Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay The stay gives the business room to work through the process without constant collection pressure.
The court appoints a trustee in Chapter 7, or a Subchapter V trustee in small business Chapter 11 cases. Within a few weeks, the court holds a meeting of creditors — the 341 meeting — where a company representative answers questions under oath. The trustee is checking for accuracy and hunting for overlooked assets. Creditors are watching for anything that affects their recovery. From there, the case moves into liquidation in Chapter 7, or plan development and confirmation in Chapter 11.
When Creditors Force the Filing
Not every business bankruptcy is voluntary. Creditors can push a business into Chapter 7 or Chapter 11 through an involuntary petition. If the business has 12 or more creditors, at least three of them holding undisputed claims totaling $21,050 above the value of any collateral must join the petition. With fewer than 12 creditors, a single creditor meeting the same dollar threshold can file alone.10Office of the Law Revision Counsel. 11 USC 303 – Involuntary Cases
Involuntary filings are uncommon because they carry risk. If the court dismisses the petition, the filing creditors can be liable for the business’s attorney fees and damages, including punitive damages for bad faith. When a business is clearly insolvent and playing favorites among creditors, though, involuntary bankruptcy is the tool creditors use to force the situation into a structured process.
Fraud and Bad Faith
Every disclosure in a bankruptcy case is signed under penalty of perjury. Concealing assets, filing false claims, making fraudulent statements, or destroying records in connection with a case is a federal crime carrying a fine and up to five years in federal prison for each offense.11Office of the Law Revision Counsel. 18 USC 152 – Concealment of Assets; False Oaths and Claims Prosecutors often stack perjury, tax fraud, and wire fraud charges alongside the bankruptcy count, which can multiply the sentence considerably.
Even without criminal charges, the court can dismiss a case filed in bad faith — typically where the petition was timed to dodge a specific judgment, expenses were inflated to look worse than reality, assets were moved before filing, or the debtor never seriously tried to pay before running to court. The threshold is high, but a filing used purely as a litigation tactic against one creditor rather than to address genuine financial distress is exactly the kind of case that gets thrown out.