Bankruptcy Basics

How Can Bankruptcy Affect Your Business?

Even though you might be struggling as a small business owner, filing for Chapter 7 bankruptcy might be the key to saving your business, or at least provide an easy way to dissolve it. In addition to business help, a Chapter 7 bankruptcy can also provide relief from personal liability for company debts.

Are You Liable for Debts That Are Business Related?

Your liability for business debts depends on the formation of your actual business. If you are the sole proprietor of the business that means you’re the only owner of the business. In this case you are personally responsible for all business debts. When you file for bankruptcy in this situation you are actually filing for a personal bankruptcy.

If your business was created as a limited liability company (LLC), partnership, or corporation, there are more factors to consider when determining liability. If your company is an LLC or a corporation then you in most cases are not liable for business related debt unless you personally guaranteed the debt. If you’re in a partnership then you can be held liable for your business debts if you are a general partner, but not if you’re a limited partner.

How Does Chapter 7 Bankruptcy Work?

Once a Chapter 7 bankruptcy is filed the automatic stay goes into effect. The automatic stay prohibits many collection activities. You are assigned a bankruptcy trustee. The Trustee is an attorney appointed by the Court. The trustee is charged with selling off nonexempt assets in order to pay off creditors based on priority.

A business bankruptcy differs from a personal bankruptcy in that there is no discharge of debts and no exemptions. The result is the sale of all business assets, the proceeds being distributed among creditors. Business bankruptcy can prevent foreclosure and repossession.

Can Chapter 7 Bankruptcy Help Small Business Owners?

Again, the answer lies in the business structure.

Sole Proprietorship

A sole proprietorship cannot file for Chapter 7 bankruptcy on its own since it isn’t a separate legal entity. The business files for Chapter 7 bankruptcy once the sole proprietor files. Because of this, all business debts are treated as personal debts and get discharged. You have the ability to use your exemptions to help protect your business assets. This can help you clear your debts and allow you to keep running your business.


Since a partnership is a legal entity separate from the individual, a Chapter 7 business bankruptcy can be filed. Remember that there are no discharges or exemption in a business bankruptcy. Your assigned trustee will close and liquidate the business by selling all assets to satisfy creditors. Also remember that you or your partner can file for bankruptcy.

Chapter 7 business bankruptcy doesn’t involve personal liability in regards to the partners, however if there are not enough business assets to pay off creditors then the partners personal assets can be at stake. General partners can also be sued in order to satisfy any remaining debts. A personal Chapter 7 bankruptcy can help alleviate these issues by discharging your obligations.


Like a partnership, a corporation can also file for Chapter 7 bankruptcy. It does not receive a discharge when filing, however. The benefit lies in the liquidation it offers to the business, the process then shifting to the trustee instead of being on the owners. Be aware that if you personally guaranteed a corporate debt that you still have to make good on it. Filing for a Chapter 7 in this instance can help absolve you of the obligation.

Limited Liability Company (LLC)

An LLC is about the same as a corporation in regards to bankruptcy and personal liability for debts. You must clear out your own debt through a personal bankruptcy filing and you can still liquidate your business by filing for business bankruptcy to handle all related business debts.

Chapter 7 bankruptcy can be an extremely useful tool whether you run a small business or a corporation. Small business owners can relieve themselves from debts they’ve incurred while still maintaining and running their business. Large businesses have an easy way to help liquidate their assets, pay off their creditors and only incur small (if any) personal payments. If you believe you’re in need of a Chapter 7 bankruptcy to help save your business, don’t hesitate to call us. We can provide you with the knowledge you need to see yourself and your business through.