As a small business owner, you have put your time, money and energy into building your business. If your small business is struggling with unmanageable debt, bankruptcy might provide a way to address the debts,
Bankruptcy is not a one-size-fits all solution. The right option for your business depends on your business structure, the type and amount of debt you owe, whether you are personally liable for the business debts and whether your goal is to close the business or keep it open.
This guide explains the primary bankruptcy options available to small business owners and some of the facts to consider before deciding what is best for you.
What Factors Should You Consider?
Before deciding whether bankruptcy is right for your small business consider:
- Your goals: Do you want to keep your business open or have you decided to close your business?
- Your business structure: Is your business a sole proprietorship, corporation, partnership or limited liability company (LLC)?
- Personal liability: Are you personally responsible for any of the business debts, have you personally guaranteed business loans or other obligations?
- Type and amount of the debts. What debts does the business owe, and how much is owed?
- Cash flow: Does your business generate enough income to continue operating and make payments under a bankruptcy plan?
There are three main bankruptcy chapters that may be relevant to a small business owner: Chapter 7, Chapter 13 and Chapter 11, including the streamlined Subchapter V option for qualifying small businesses.
The best option for you depends upon your specific goals and financial situation. An experienced small business bankruptcy attorney can help you evaluate your options before you decide what to do.
Bankruptcy Options for Small Businesses
There are 3 different types of bankruptcy, but not every type is available to every business. Chapter 7 and Chapter 11 bankruptcy are available to both businesses and individuals. Chapter 13 bankruptcy is available only to individuals.
If your small business operates as a sole proprietorship, or if you have personally guaranteed the business debt, the line between business and personal bankruptcy becomes blurred and there may be multiple options to consider.
Chapter 7 Bankruptcy
Chapter 7 is generally used when a business can’t afford to continue operating and needs to be liquidated. For a business that is closing, a Chapter 7 bankruptcy may provide an orderly process for dealing with business assets and creditors.
Sole Proprietorship:
A sole proprietorship is not legally separate from it’s owner. Therefore, the owner of a sole proprietorship is generally responsible for the business debts and liabilities.
For that reason, an individual who is the sole owner of the small business often files a Chapter 7 in their own name after they close the business. There can be significant benefits to filing the Chapter 7 since the bankruptcy discharge eliminates both the business and personal debt.
Under Chapter 7, you are usually not required to repay your creditors and can have a fresh start in as little as three to four months.
You can learn more about the issues involved when closing a sole proprietorship in our article about protecting yourself when your sole proprietorship closes.
Partnerships, Corporations and LLCs
If your business is a partnership, LLC, or corporation, it cannot discharge its debt with a Chapter 7 bankruptcy. A Chapter 7 would, however, allow for an orderly liquidation of the business assets.
It is important to recognize that although creditors cannot collect from a company that no longer exists, you may be personally liable for the business debt if you personally guaranteed the debt.
Chapter 13 Bankruptcy
Although only individuals can file a NJ Chapter 13 bankruptcy, if you operate your business as a sole proprietor, you might be able to use Chapter 13. Chapter 13 allows individuals who operate as a sole proprietorship to reorganize debt, stay in business, and avoid asset liquidation. As a sole proprietor you would have to file for bankruptcy under your own name and not the business name.
Chapter 13 Debt Limits
There are limits to the amount of debt you can have and still be eligible to file a Chapter 13 Bankruptcy. For cases filed on or after April 1, 2025, an individual must have less then $1,580,125 in non contingent, liquidated secured debt( e.g., mortgages and car loans) and $526,700 in noncontingent, liquidated unsecured debt (.e.g. credit cards, personal loans, and medical bills) to qualify to file a Chapter 13.
If your debts exceed the Chapter 13 limits, a Chapter 11 bankruptcy may be the right choice for your business.
How Chapter 13 Works For a Sole Proprietor
When you file a Chapter 13 bankruptcy you propose a repayment plan that shows how you intend to repay your debts within 3 to 5 years.
During the repayment period you make monthly payments to the Bankruptcy Trustee who oversees your case. The Trustee then pays your creditors according to your plan. Through this process you may be able to discharge some debts or pay them at a more affordable rate.
The amount you pay depends on a number of factors, including the types of debts you owe, the value of your assets, your income, and your ability to pay.
For a sole proprietor with sufficient income to continue operating the business, Chapter 13 may provide a way to address past-due debts while keeping the business open.
You can learn more about the bankruptcy process and how Chapter 13 works.
Chapter 11 Bankruptcy
Chapter 11 is used by businesses that want to continue operating but need to restructure their debts.
Chapter 11 business bankruptcy may be used by for partnerships and corporations, and LLCs. In appropriate circumstances it is also used by individuals and sole proprietors.
In a Chapter 11 bankruptcy, the debtor remains in possession of its assets and continues operating the business while it develops a plan for dealing with its debts.
In a Chapter 11, the company files a plan showing how it will repay its creditors. In the plan the business may terminate contracts and leases, recover assets, and repay some portion of its debts. As in Chapter 13, a Chapter 11 reorganization plan provides for repayment over time.
Traditional Chapter 11 cases, however, can be complicated, time-consuming, and very expensive. For qualifying small businesses, Subchapter V of Chapter 11 provides a streamlined and less expensive alternative that makes Chapter 11 far more accessible for small businesses.
Small Business Reorganization Act (Subchapter V)
You may be able to save your business by filing a small business bankruptcy. The Small Business Reorganization Act commonly referred to as the SBRA can often provide a lifeline to help a struggling small business to survive. The SBRA is also referred to as Subchapter V of Chapter 11 of the Bankruptcy Code.
Subchapter V Debt Limit
For cases filed on or after April 1, 2025, a qualifying small business must have $3.424 million or less in combined noncontingent, liquidated secured and unsecured debt, with at least 50% of that debt arising from the debtor’s commercial or business activities.
Because eligibility requirements can be complicated, a business should consult with an experienced bankruptcy attorney before determining whether it qualifies for Subchapter V.
How Does Subchapter V. Work?
A Subchapter V bankruptcy allows an eligible business to propose a plan for reorganizing its debts and paying creditors over time
The plan may provide for such things as catching up on missed rent, mortgage, equipment leases, and/or secured bank debt and for the payment of some, or all of the debt owed to vendors or other unsecured creditors.
The plan must provide for payments over 3 years but, if necessary, it can be extended up to 5 years. The plan payments are made from future business income.
The plan must be approved by the Bankruptcy Court.
Once the requirements of the plan are satisfied, qualifying remaining debts may be discharged.
What Businesses Can Benefit from the Subchapter V?
Subchapter V may be a good option for a business that can meet ongoing obligations but needs time to address past due obligations including rent and loan payments. It might be the only chance that the small business will have to continue operating and stay in its premises when facing the threat of eviction. If your small business has enough cash flow to stay open and you believe it has a viable future, Subchapter V may be your best option.
Which Bankruptcy Option is Right For Your Small Business?
There is no single bankruptcy option that is right for every small business.
A business that needs to close may need to consider Chapter 7. A sole proprietor who wants to remain in business may qualify for Chapter 13. A business that needs to reorganize and continue operating may be a candidate for Chapter 11 or, if it meets the requirements, Subchapter V.
The answer depends on your business structure, the amount and type of your debts, your personal liability for business obligations, the value of your assets, and whether your business has enough income to support continued operations.
Because the consequences of filing bankruptcy can be significant, it is important to understand your options before filing.
Contact Levitt and Slafkes Today
If your small business is struggling with debt and you are unsure what to do next, we can help you understand your options.
Contact Levitt and Slafkes to schedule a free consultation and discuss your situation. Call 973-323-2953 or complete our contact form.
We are proudly designated as a debt relief agency by an Act of Congress. We have proudly assisted consumers in filing for Bankruptcy Relief for over 30 years. The information on this website and blogs is for general information purposes only. Nothing should be taken as legal advice for any individual case or situation.