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Small Business Bankruptcy: What Are Your Options?

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Kelly Boyer Sagert

Kelly Boyer Sagert

Updated July 19, 2021
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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.
If you’re thinking about filing small business bankruptcy, you’ll naturally have plenty of questions about what kind of bankruptcy you’re eligible for and what might make the most sense for your business. After all, this is a big decision to make, with lots of considerations and nuances. To help, here are answers to some frequently asked questions on the subject. 

What Are the Different Types of Bankruptcy for Business Owners?

This short answer is this: 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 US and in other countries when bankruptcy proceedings filed in foreign countries involve US financial interests.  

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. 

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

Pros when filing business bankruptcy, Chapter 7, may include the following:

  • 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.

Cons of filing business bankruptcy, Chapter 7, include the following:

  • 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. 

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

Pros when filing business bankruptcy, Chapter 11, may include the following:

  • 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 business bankruptcy, Chapter 11, include these:

  • 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 family farmers and family fisherman, 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 can include the following:

  • 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 reduce some loans; and use this restructuring to catch up on other qualifying payments.

Cons when filing for Chapter 13 bankruptcy may include the following:

  • 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.

The Takeaway

Sometimes, bankruptcy may ultimately be the right choice for a small business. In that case, the owner may be looking for loans after bankruptcy, whether quick personal loans or small business loansLantern by SoFi makes it easy to see the range of options. Fill out one simple application to receive offers from multiple lenders from our lending partners.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0421074

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?

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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