Whether you can keep your business if you file for bankruptcy depends on two things: the chapter you file under and how your business is legally organized. A sole proprietor in Chapter 13 can usually keep operating and repay debts over three to five years. The same owner in Chapter 7 may lose business assets that don’t fit within exemptions. LLCs and corporations play by different rules again, and Chapter 11 or Subchapter V exists specifically to let an entity keep running while it restructures. The choice you make before filing often decides whether the business is still there when the case ends.
Your Business Structure Decides Almost Everything
Bankruptcy treats a sole proprietorship and its owner as the same person. There is no legal wall between your business checking account and your personal savings, or between the equipment you use for work and the furniture in your living room. Business debts are your personal debts, and business assets are your personal assets.1Forbes. Chapter 7 Bankruptcy For Sole Proprietors A personal filing sweeps everything into one case.
LLCs and corporations are separate legal entities. What you personally own is your interest in the business, whether that is membership units in an LLC or shares in a corporation, not the equipment or inventory itself.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. Those are two different situations with two different outcomes, and many owners don’t realize they have a choice between them.
Partnerships sit somewhere in between. A general partnership can file as an entity, but the filing does not shield the individual general partners from partnership debts. A trustee can pursue partners personally for any shortfall after partnership assets run out, which often forces partners into their own personal cases.
Personal Guarantees Can Undo the Protection You Built
Even if you set up an LLC or corporation specifically to keep your personal assets separate, personal guarantees can erase that wall. Lenders routinely require small business owners to personally guarantee loans, leases, and credit lines. If the business files bankruptcy, that filing does nothing to your personal obligation under the guarantee. Only individual debtors receive a discharge in Chapter 7. Corporations and LLCs do not.3Office of the Law Revision Counsel. 11 USC 727 – Discharge To eliminate a personal guarantee, you generally need to file your own personal case, separate from anything the business does.
Chapter 7 Is Fast, but the Business May Not Survive It
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 and no multi-year process, and at the end most remaining debts are discharged for individual filers.
Sole Proprietors
Whether a sole proprietor keeps the business through Chapter 7 comes down to exemptions. Federal law and most states let you protect certain 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 used in your trade, up to $5,025 in a vehicle, and a wildcard exemption of $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; you cannot mix.
If your business assets fit within the exemption limits, you can come through Chapter 7 still operating. A freelance graphic designer whose main tools are a laptop and some software subscriptions is in a very different position from a contractor with $80,000 in heavy equipment. For asset-heavy sole proprietorships, Chapter 7 usually means the business doesn’t survive.
LLC and Corporation Owners
When you personally file Chapter 7 and own an LLC or corporation, the trustee treats your ownership interest as an asset. If that interest 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 takes control, including the right to manage the LLC and make decisions on its behalf. For multi-member LLCs the result is more nuanced, 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 going through Chapter 7 do not receive a discharge.4U.S. Courts. Chapter 7 Bankruptcy Basics The trustee sells off the assets, distributes what’s available, and the entity winds down.
The Means Test Can Close the Door
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 it, the court applies a more detailed calculation that subtracts allowed expenses, and if the remainder 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 but crushing debt often hit this wall.
Chapter 13 Is How Most Sole Proprietors Keep the Business
Chapter 13 is where most sole proprietors who want to keep operating end up. Instead of liquidating your assets, you propose a repayment plan that runs 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 ongoing income. For a business owner, that income is often the business’s own revenue.
The plan has to meet the “best interests of creditors” test: every unsecured creditor must receive at least as much through your plan as they would have gotten if you’d filed Chapter 7 and your assets had been liquidated.8Office of the Law Revision Counsel. 11 USC 1325 – Confirmation of Plan If you own expensive equipment that would not have been exempt in Chapter 7, your monthly payments go up to compensate creditors for the value they are forgoing. Complete the plan, and remaining eligible debts are discharged.
Chapter 13 has caps on how much debt you can carry into it. 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 obligations both count toward these totals. If your debts push past the limits, Chapter 11 becomes the alternative.
Chapter 11 and Subchapter V Keep an Entity Running
Chapter 11 is the reorganization option available to any type of business entity, including corporations, LLCs, partnerships, and individuals whose debts exceed the 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 a typical case the business stays in control of its operations as a “debtor in possession,” keeping 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 It can continue signing contracts, paying employees, and serving customers while it negotiates with creditors. With court approval, it can borrow new money to fund operations. The plan can renegotiate loan terms, reject burdensome contracts and leases, and reduce overall debt. When it works, the business emerges with a sustainable debt load. When it doesn’t, the case can be converted to Chapter 7.
The problem with traditional Chapter 11 is cost. Attorneys, accountants, quarterly U.S. Trustee fees, possible creditor committees with their own lawyers, and a timeline that can stretch well over a year add up fast. For a small business, those expenses alone can kill the reorganization.
Congress created Subchapter V in 2019 for exactly that reason. It is a streamlined version of Chapter 11 built for small businesses. To qualify, total business debts, secured and unsecured combined and excluding debts owed to insiders or affiliates, must be below $3,424,000 as of the most recent adjustment. Subchapter V drops the creditor committee, drops the quarterly U.S. Trustee fees, and compresses the timeline. A Subchapter V trustee is appointed, but the trustee’s main job is to help facilitate a workable plan, not take over the business.
You stay in control throughout the case. If creditors accept the plan, you get a discharge on confirmation. Even if they reject it, you can still get the plan confirmed through a cramdown as long as you commit your projected disposable income for three to five years, though a nonconsensual plan comes with drawbacks including a delayed discharge and the trustee taking over payment distribution. For most small businesses with viable operations but unsustainable debt, Subchapter V has become the default path.
Matching the Chapter to Your Situation
A sole proprietor with modest assets and debts within the Chapter 13 limits is usually better off in Chapter 13. The business keeps running, and the debt gets restructured over time. If the assets are minimal and the means test allows it, Chapter 7 can deliver a faster fresh start, but the business only survives if every asset fits within your available exemptions.
LLC and corporation owners face different questions. If the business is viable but drowning in debt, a Chapter 11 or Subchapter V filing by the entity keeps operations going while obligations get restructured. If the business isn’t salvageable, the entity can file Chapter 7 to wind down, but the entity won’t get a discharge and any personal guarantees you signed will follow you home. Dealing with that guarantee liability generally means filing your own personal case in addition to whatever the business does.
Filing Sooner Protects More of the Business
The moment you file, an automatic stay stops most collection activity against you and your property. Creditors cannot start or continue lawsuits, enforce judgments, repossess equipment, foreclose, or make collection calls.12Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay The stay applies whether you file personally as a sole proprietor or the LLC or corporation files its own case. Secured creditors can ask the court to lift it if collateral isn’t adequately protected, but they have to get permission first.
The stay is powerful, and it works best when there is still something worth protecting on the other side of it. Filing before assets are seized, before a key contract is terminated, or before cash reserves are completely drained leaves you with more options and more leverage. Owners who wait until the last week rarely have the room to choose the right chapter; they take whatever chapter they can still qualify for.