Yes, a business can file for bankruptcy and stay open. Federal law offers three reorganization paths that let a company keep operating while it restructures what it owes: Chapter 11, Subchapter V of Chapter 11, and, for sole proprietors, Chapter 13. Which one fits depends on how the business is organized, how much debt it carries, and who the owners want running the company during the case.
Which Chapter Fits Which Business
Chapter 11 is the standard reorganization tool for corporations, partnerships, and LLCs. There is no debt ceiling, and existing management usually stays in charge as the “debtor in possession.”1Office of the Law Revision Counsel. 11 USC Ch. 11 REORGANIZATION The tradeoff is cost and oversight: the U.S. Trustee appoints a committee of unsecured creditors that reviews the business’s finances and helps shape the plan, which adds time and legal fees.2Office of the Law Revision Counsel. 11 USC 1102 Creditors and Equity Security Holders Committees
Subchapter V is a streamlined version of Chapter 11 built for small businesses. Total debts must sit at or below roughly $3.4 million after the April 2025 triennial adjustment, and at least half of that debt must come from commercial activity. A temporary $7.5 million ceiling expired in June 2024 and was not extended. Inside that limit, Subchapter V strips out much of what makes standard Chapter 11 expensive:
- No creditors’ committee is appointed unless the court orders one.2Office of the Law Revision Counsel. 11 USC 1102 Creditors and Equity Security Holders Committees
- Only the debtor can propose a plan, and it must be filed within 90 days of the petition (extendable for cause).3Office of the Law Revision Counsel. 11 USC 1189 Filing of the Plan
- A Subchapter V trustee is appointed, but the role is to help the debtor build a workable plan, facilitate negotiations, and monitor performance, not to take over operations.4Office of the Law Revision Counsel. 11 USC 1183 Trustee
Chapter 13 is the path for a sole proprietor, because there is no legal separation between the owner and the business. The owner keeps all property, including business equipment and inventory, and pays creditors through a court-supervised plan.5Office of the Law Revision Counsel. 11 USC Ch. 13 Adjustment of Debts of an Individual With Regular Income – Section: 1304 Debtor Engaged in Business Eligibility is tighter than Chapter 11: the owner needs regular income, and as of the April 2025 adjustment, unsecured debts must be below $526,700 and secured debts below $1,580,125. Those limits are revisited every three years.6Office of the Law Revision Counsel. 11 U.S. Code 109 – Who May Be a Debtor
The Chapter 13 repayment plan runs three to five years. If household income is below the state median for the same household size, the plan runs up to three years, though the court can extend it to five for cause; at or above the state median, the plan can run the full five.7Office of the Law Revision Counsel. 11 U.S. Code 1322 – Contents of Plan Payments are based on disposable income after living expenses, dependent support, and ordinary business operating costs.8United States Courts. Chapter 13 – Bankruptcy Basics
What Happens the Moment You File
Filing the petition triggers an automatic stay. That is a court order that immediately stops creditors from collecting, suing, repossessing equipment, foreclosing, or even contacting the business about past-due accounts.9Office of the Law Revision Counsel. 11 U.S.C. 362 – Automatic Stay It applies to nearly all collection activity that began before the filing date, under any chapter.
For a business trying to stay open, this is usually the whole point of filing. The landlord threatening eviction, the lender ready to seize equipment, the supplier suing over unpaid invoices — all of that pauses. The stay lasts until the case is closed, dismissed, or a creditor persuades the court to lift it for a specific debt, typically when collateral is losing value without adequate protection.
Who Runs the Business During the Case
In Chapter 11 and Subchapter V, the existing management team keeps running the company as debtor in possession, with nearly all the powers of a bankruptcy trustee: using business property, negotiating with creditors, and making operational decisions. The accountability side of that bargain is real. A Chapter 11 debtor must attend an initial interview with the U.S. Trustee, then file monthly operating reports showing money in and money out. In Subchapter V, the appointed trustee stays involved throughout the case, and in Chapter 13 the court’s standing trustee administers the repayment plan.
Paying for Operations While in Bankruptcy
Filing does not create cash. A reorganizing business generally funds operations from two sources.
Cash Collateral
Cash collateral is any cash, bank deposits, or accounts receivable that a creditor already has a security interest in. The business cannot spend it without that creditor’s consent or a court order, and until one of those happens the funds must be kept in a separate account.10Office of the Law Revision Counsel. 11 U.S. Code 363 – Use, Sale, or Lease of Property Courts usually hold a cash collateral hearing within days of filing, because without access to those funds many businesses simply cannot operate.
Debtor-in-Possession Financing
When cash on hand is not enough, the business can borrow. Ordinary-course credit does not need prior court approval; anything beyond that does. To make the loan attractive, the court can give a new lender priority over existing unsecured creditors or grant a lien on unencumbered property.11United States Courts. Chapter 11 – Bankruptcy Basics In hard cases, the court can even approve a lien that primes an existing creditor’s lien, but only if the debtor shows it cannot get financing any other way and the existing creditor’s interest is adequately protected.
Leases and Contracts You Want to Keep — or Drop
Bankruptcy lets the debtor in possession pick and choose. Contracts and unexpired leases can be assumed (kept) or rejected (walked away from), subject to court approval.12Office of the Law Revision Counsel. 11 U.S. Code 365 – Executory Contracts and Unexpired Leases To assume an agreement the business has fallen behind on, it must cure the default (or show it will cure promptly), compensate the other party for losses caused by the default, and demonstrate it can perform going forward. A landlord or supplier cannot cancel an agreement just because the tenant or customer filed; the filing itself is not grounds for termination.
Commercial real estate has its own clock. If a nonresidential lease is not assumed within 120 days of filing, it is automatically deemed rejected and the business must vacate. The court can grant one 90-day extension for cause; anything beyond that requires the landlord’s written consent. This deadline forces early decisions about physical locations.
What You File and What It Costs
Before filing, gather the paperwork the court and trustee will demand:
- Federal tax returns for prior years, plus any unfiled returns for years ending within four years of the filing date.13Internal Revenue Service. Publication 908 (2025), Bankruptcy Tax Guide
- Current monthly income and expense statements.
- A complete asset inventory — real estate, equipment, inventory, receivables, intellectual property.
- Every active contract and lease.
- A full creditor list with amounts and the nature of each debt.
A non-individual business case starts with the Voluntary Petition for Non-Individuals (Official Form 201), filed electronically through the court’s CM/ECF system. The petition comes with schedules: Schedule A/B lists property, Schedule D lists secured creditors, and Schedules E/F cover unsecured debts. Classification matters, because secured creditors have stronger repayment rights than unsecured ones.
Fees run in layers. The Chapter 11 filing fee is $1,738, payable when the petition is filed (installments are sometimes allowed). Chapter 13 filing costs $338. Every Chapter 11 debtor also pays quarterly U.S. Trustee fees based on total disbursements. Through the end of 2025, the temporary schedule set the minimum at $250 per quarter for businesses disbursing less than about $63,000, scaling to 0.8% of disbursements for larger cases, capped at $250,000 per quarter.14U.S. Department of Justice. Chapter 11 Quarterly Fees That temporary schedule under the Bankruptcy Administration Improvement Act expired at the end of 2025, so 2026 quarters may differ. Attorney rates for bankruptcy counsel range roughly from $100 to over $500 per hour, and the business may also need accountants, financial advisors, or appraisers. Every professional fee must be approved by the court as reasonable.
Getting to a Confirmed Plan
Staying open through a whole case ultimately depends on a confirmed reorganization plan. In standard Chapter 11, the debtor has an exclusive 120-day window to propose one before creditors can file competing plans. The plan groups creditors by the type of debt and spells out what each group gets.
To confirm the plan, the court has to find, among other things, that it was proposed in good faith, that every creditor receives at least what they would in a Chapter 7 liquidation, and that the business can realistically make the promised payments without needing to reorganize again — the feasibility test.15Office of the Law Revision Counsel. 11 U.S. Code 1129 – Confirmation of Plan At least one class of impaired creditors has to vote yes. If some impaired classes vote no, the court can still confirm through “cramdown” if additional fairness rules are met.
Subchapter V is simpler. There is no separate disclosure statement, and if creditors reject the plan, the court can still confirm it as long as it commits all of the debtor’s projected disposable income for three to five years and is fair and equitable to each dissenting class. The plan must include a brief business history, a liquidation comparison, and financial projections showing the payments are achievable.
When Staying Open Stops Being an Option
Not every reorganization works. Any creditor, the U.S. Trustee, or the debtor itself can ask the court to convert the case to Chapter 7 liquidation or dismiss it. The court must grant the request if it finds “cause,” and cause covers a wide field:16Office of the Law Revision Counsel. 11 USC 1112 Conversion or Dismissal
- Continuing losses with no realistic prospect of recovery.
- Gross mismanagement of the estate.
- Missed filing deadlines, unfiled reports, unpaid post-filing taxes, or a skipped creditors’ meeting.
- Unpaid quarterly U.S. Trustee fees or other court charges.
- Default on a confirmed plan or inability to make its payments.
There is a narrow exception. The court can decline to convert if the debtor shows “unusual circumstances,” meaning a plan is likely to be confirmed within the statutory timeframe and the underlying problems are being fixed. In practice, this is hard to meet.
Tax Consequences of Discharged Business Debt
Debt forgiven outside bankruptcy is normally taxable income. Debt discharged in a bankruptcy case is not — the exclusion applies regardless of amount and covers Chapter 7, 11, and 13 cases, as long as the discharge was granted by or occurred under a plan approved by the bankruptcy court.17Office of the Law Revision Counsel. 26 U.S. Code 108 – Income From Discharge of Indebtedness In exchange, the business has to reduce certain tax attributes — net operating loss carryovers, credit carryovers, and asset basis — by the excluded amount, reported on Form 982 with the federal return.18Internal Revenue Service. Publication 4681 (2025), Canceled Debts, Foreclosures, Repossessions, and Abandonments Reducing basis can mean more tax later when the assets are sold, so the benefit is often a deferral rather than a permanent savings.