A business in financial trouble can liquidate or reorganize through bankruptcy. The right option depends on the business type, debts and goals.
Main options
- Chapter 7: the business closes and a trustee sells assets to pay creditors.
- Chapter 11: reorganization where the business keeps operating under a court-approved plan.
- Subchapter V of Chapter 11: a streamlined process for small businesses with lower debt limits.
- Chapter 13 or 7 for individuals with sole proprietorships.
Owner liability
Corporations and LLCs are separate from owners, but owners can be personally liable for guarantees, taxes and certain debts. Sole proprietors are personally liable for business debts, so they may file as individuals.
Questions to ask
- Is the business viable if debts are reduced?
- Which debts are personally guaranteed?
- What are the costs and timelines?
- How will employees, leases and contracts be affected?
- Are there alternatives, such as negotiating with creditors or selling the business?
Get help
Business bankruptcy is complex and the stakes are high. Consult a bankruptcy attorney early, before missing payroll taxes or transferring assets.
Frequently asked questions
Can I keep running the business in Chapter 11?
Usually yes, as debtor in possession.
Does bankruptcy stop lawsuits?
The automatic stay pauses most collection actions.