Small Business Bankruptcy: What Are Your Options?

Small Business Bankruptcy: What Are Your Options?; When thinking about filing small business bankruptcy, it’s natural to have plenty of questions. To help, here are answers, including on bankruptcy types.

Kelly Boyer Sagert

Kelly Boyer SagertUpdated April 24, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

If you’re thinking about filing bankruptcy for your small business, you’ll have plenty of questions about what kind of bankruptcy you’re eligible for and what might make the most sense for your business. This is a big decision to make, with lots of considerations. To help, here are answers to some pressing questions on this fraught subject.

What Are the Different Types of Bankruptcy for Business Owners?

The types of bankruptcy that apply are Chapters 7, 11, 12, and 13. There is a Chapter 9 bankruptcy, but that applies only to municipalities: cities, counties, school districts, and so forth. There is also a Chapter 15 bankruptcy, but that’s designed to facilitate the legal processes between courts in the U.S. and in other countries when bankruptcy proceedings filed in foreign countries involve U.S. financial interests. Recommended: Bankruptcy vs Insolvency: What's the Difference?

Who Can File Chapter 7 Bankruptcy?

This Chapter of the Bankruptcy Code provides for “liquidation.” When you file for Chapter 7 bankruptcy, your assets will be sold (“liquidated”) and the money used to pay your creditors.Individual people can file for Chapter 7 and so can businesses. Small business owners are able to choose whether to file on their own personal behalf or on behalf of the business. Recommended: Business Credit vs Personal Credit Compared

What Are the Pros and Cons of Filing a Chapter 7 Bankruptcy?

Pros when filing business bankruptcy, Chapter 7:

A sole proprietor can handle both aspects within the same bankruptcy filing. Because a business Chapter 7 bankruptcy doesn’t erase any debt, many business owners who choose the Chapter 7 route file personally because of the protections that offers.
Sole proprietors whose business debt is greater than their personal debt won’t have to meet income requirements for Chapter 7. Plus, there are bankruptcy exemptions that, in some cases, would allow them to continue to operate the business, post-bankruptcy.
With an LLC or a corporation bankruptcy, Chapter 7 provides a transparent way to liquidate the company. The bankruptcy trustee is responsible for selling the business assets and using the funds to pay creditors.

Recommended: Understanding Business Debt Consolidation Loan Options

Cons of filing business bankruptcy, Chapter 7:

Only sole proprietors have the opportunity to get rid of both personal and business debt under this structure.
Business assets aren’t generally protected, which means that the bankruptcy trustee will sell the business assets to pay off creditors and, in many cases, the business closes.
In most circumstances, if the business owners sold the assets and used the funds to pay down debt without filing for bankruptcy, they could usually get a better price for those assets than they would through bankruptcy.

Who Can File Chapter 11 Bankruptcy?

This may also be called a “reorganization” bankruptcy, since it means that, while you may stay in business, you will likely need to provide a plan for reorganizing your financial situation. This type of business bankruptcy is available for individuals, as well as for LLCs, corporations and partnerships. Recommended: Business Loans: Defaults & Failure to Pay

What Are the Pros and Cons of a Chapter 11 Bankruptcy?

Pros when filing Chapter 11:

There are no debt or income requirements.
Extended payment terms are available for the business owner to pay back creditors.
Disposable income does not have to be turned over to a trustee.

Cons of filing Chapter 11:

This proceeding is complex.
Chapter 11 bankruptcies are expensive.

Who Can File Chapter 12 Bankruptcy?

Chapter 12 bankruptcy enables financially distressed family farmers and family fishermen to propose and carry out a plan to repay some or all of their debt. Chapter 12 is similar to Chapter 13 (below) but is only available for those family farmers and family fishermen, giving them an opportunity to avoid foreclosure or liquidation.

Who Can File Chapter 13 Bankruptcy?

This form of bankruptcy allows individuals with a regular income to keep their property and pay off their debt over time, usually three to five years.Among small businesses, only sole proprietors can file for Chapter 13, so this avenue is not an option for corporations or LLCs. That said, in some instances, filing personally may provide enough leeway for a business owner with an LLC or corporation structure to keep his or her company going.

What Are the Pros and Cons of Chapter 13 Bankruptcy?

Pros when filing Chapter 13 bankruptcy:

Assets can be kept while the business owner repays some or all of the debts via a repayment plan of up to five years.
The business owner can pay down prioritized debt; potentially refinance some loans; and use this restructuring to catch up on other qualifying payments.

Cons when filing for Chapter 13 bankruptcy:

This plan is not available for business owners other than sole proprietors.
The payments under the repayment plan may be challenging to make.
Payments will be required for three to five years.

Chapter 7 vs. Chapter 11 vs. Chapter 13 Bankruptcy

Below is a chart that sums up some of the important features of the three most common types of bankruptcy so that you can see them all together.

	Chapter 7	Chapter 11	Chapter 13
What Does It Do?	In a “liquidation” bankruptcy, your assets will be sold (“liquidated”) and the money used to pay your creditors	In a “reorganization” bankruptcy, you may be able to stay in business, but will need to provide a plan for reorganizing your finances and repaying your debts	Also called a “wage earner’s plan,” this bankruptcy allows individuals with a regular income to keep their property and pay off their debt over three to five years
Who’s Eligible?	Individuals and small businesses	Individuals, LLCs, corporations and partnerships	Individuals and sole proprietors
Pros?	Sole proprietors can handle both personal and business bankruptcy in one filing. For LLCs and corporations, the trustee provides a transparent way to liquidate	No debt or income requirements. Extended payment terms are available Disposable income does not have to be turned over to a trustee	Assets can be kept while you repay some or all of the debt. You can pay down prioritized debt, reduce some loans, and use this restructuring to catch up on other qualifying payments.

The Takeaway

When a small business struggles–and sometimes can’t even service its debt–it’s understandable that an owner would wonder about filing for bankruptcy. That can be a viable way to best protect the business and reorganize financial obligations. But it has risks as well. And it’s very important to choose the type of bankruptcy that fits with your needs and priorities.

3 Small Business Loan Tips

Online lenders generally offer fast application reviews and quick access to cash. Conveniently, you can find recommended small business loans by using Lantern by SoFi.
If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit.
If you need to borrow money to cover seasonal cash flow fluctuations, a business line of credit, rather than a term loan, provides the flexibility you likely need.

Frequently Asked Questions

Are you personally liable for your business debts?

How will the bankruptcy affect your personal credit?

How will this affect your business credit?

What happens if a business files for bankruptcy?

When should you file a business bankruptcy?

Can you start a business after filing for bankruptcy?

What happens if an LLC files for bankruptcy?

When you file for bankruptcy who pays the debt?

What are the different types of bankruptcy for businesses?

Who can file for Chapter 7 bankruptcy?

Who can file for Chapter 13 bankruptcy?

Who can file for Chapter 11 bankruptcy?

Who can file for Chapter 12 bankruptcy?

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About the Author

Kelly Boyer Sagert

Kelly Boyer Sagert

Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.

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