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Kevin O'Flaherty

In this article, we’ll discuss what factors to consider when contemplating bankruptcy for your business, what type of bankruptcy is right for your business, and the pros and cons of each option.

Owning a successful business that is cruising along like a well-oiled machine can be a very rewarding experience; just as owning a business that is digging itself deeper into debt can feel like suffocating jail cell.  Every business owner understands the ups and downs of running a business, but it’s important to know what tools are at your disposal should your business run into an extended time of financial difficulty.

The first step is taking a close look at your business and asking yourself some potentially uncomfortable questions, such as “should I just close the business and cut my losses?”

Should I Keep My Business Open?

Eight Questions To Ask About Your Business

  1. Is bankruptcy really necessary? Can you, with the help of a good accountant and attorney settle your debts outside of any official legal means?
  2. How much money is my business making? For a lot of people, the whole point of starting a business is to make money and earn financial freedom, or at least a consistent income that provides for you and your family. If you’ve been losing money for some time and you don’t have any solid plans on how to turn things around, closing your doors for good might be the best option. But if you own a profitable company that is experiencing a prolonged period of difficulty due to circumstances outside your immediate control, filing for bankruptcy and developing a fresh plan to get through the bad times can be a sound financial decision.
  3. Is your current team the right one to turn around your business? If you’re a sole proprietorship this question doesn’t really apply to you, but you still need to ask yourself if you can turn the corner on your own. If you’re not sure, it wouldn’t be a bad idea to seek out a small business consultant, or bankruptcy attorney. 
  4. What are the business’ assets worth versus its liabilities? If the business’ assets are still outpacing its liabilities, and the business is still making a reasonable amount of money than it is probably worth saving. Through bankruptcy, you can reorganize or eliminate your debt and keep your doors open. If after evaluating your business and finding that bankruptcy is not the right option you can consider liquidating your assets—such as property if the business has any—to pay off debt and then restructuring. 
  5. If you want to continue to operate your business what kind of bankruptcy can you actually afford? It’s important to be realistic about your bankruptcy options. Chapter 7 and Chapter 13 bankruptcy don’t have large attorney fees attached, but Chapter 11 can become expensive. This is a very good conversation to have with a bankruptcy attorney.
  6. Are you personally liable for the business debts? If it’s all on you then it might be advantageous to keep your doors open as you try to negotiate with creditors. Once you close down the business you may leave creditors with no other option than to go after your personal assets if the business assets are not enough to settle your debts. Bankruptcy provides a degree of protection for some of your personal assets. For example, filing a Chapter 7 bankruptcy will eliminate the personal guarantee (a contractual agreement to pay debt with personal assets if business assets are not adequate) and protect you from creditors going after your personal assets.
  7. Are you ready to expose your business to the courts? Privacy is not a luxury given to businesses filing for bankruptcy. At the very least, make sure you’ve got all your ducks in a row and speak with a bankruptcy attorney before deciding to file.
  8. Can you run a business under the restrictions applied through bankruptcy? You can continue to run your day to day operations under bankruptcy, but if you wish to do anything outside of your normal operations you will need to seek the approval of the court first.
  9. Are some of the company’s debts guaranteed by other partners? Filing for bankruptcy will not protect other partners in the business form creditors.

What Type of Bankruptcy Is Best For Your Business?

The structure of your business and the answers to the above question will determine what bankruptcy is best for your business.

signing bankruptcy papers

Chapter 7 Bankruptcy For Businesses

Most businesses will not file Chapter 7 unless the business is structured as a sole proprietorship. This is because filing Chapter 7 bankruptcy almost certainly means the business will close, and there is no way to protect property owned by a separate legal entity such as a corporation or LLC when filing Chapter 7. Other reasons to avoid using Chapter 7 bankruptcy to close a business include:

  • Some business owners may be able to sell off the assets and close their business without any outside legal help;
  • Business owners can often get a better price for their assets than the bankruptcy trustee, whose primary job is just to liquidate the businesses assets by whatever means;
  • Chapter 7 can put the personal assets of partners at risk;
  • Filing for bankruptcy opens up the business and the business owner to litigation from creditors for any number of reasons.

The primary benefit of closing the business through Chapter 7 is that the process of selling everything and settling all your debts is handled by the bankruptcy trustee. This streamlines the bankruptcy proceedings and creates a transparent bankruptcy process that can dissuade creditors from claiming fraud or taking other legal actions.

Chapter 7 bankruptcy can also be a good choice for sole proprietors who do not have a large amount of equipment or property associated with their business. For example, massage therapists, accountants, freelance writers, fitness trainers, etc, usually rent space from other facilities or require very little equipment. They can wipe out their debt and easily continue with their business. 

On a side note, if you have more business debt than consumer debt you can file a business bankruptcy and avoid the means test, meaning your income will not be considered in the bankruptcy, decreasing the chance you won’t qualify for Chapter 7.

Pros and Cons of Chapter 13 Bankruptcy For Business Owners


  • The main difference between Chapter 7 and Chapter 13 Bankruptcy is that Chapter 7 wipes out all of your debt and likely shuts your business down in a clean way, while Chapter 13 restructures your debt into a 3 to 5-year payment plan. 
  • Chapter 13 also allows you to restructure non priority unsecured debt, such as credit card bills, car payments, personal loans, etc. 
  • Chapter 13 allows you to keep your property.


  • Chapter 13 can only be filed by an individual, so forget about it if your business is an LLC, partnership, etc. 
  • While you can keep your property under Chapter 13 it will need to be protected under a bankruptcy exemption, and most exemptions won’t cover assets beyond what is absolutely necessary.
  • The value of any nonexempt assets that you wish to keep will be included in the 3-5 year payment plan. As you can imagine, this monthly payment can increase quickly depending on the number and value of assets.

There are other types of bankruptcy, such as Chapter 11, that a business owner can utilize. If you are considering bankruptcy and you’re not sure how to proceed, the best first step is to consult with a qualified bankruptcy attorney. For more information, give us a call at 630-324-6666.

Disclaimer: The information provided on this blog is intended for general informational purposes only and should not be construed as legal advice on any subject matter. This information is not intended to create, and receipt or viewing does not constitute an attorney-client relationship. Each individual's legal needs are unique, and these materials may not be applicable to your legal situation. Always seek the advice of a competent attorney with any questions you may have regarding a legal issue. Do not disregard professional legal advice or delay in seeking it because of something you have read on this blog.


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