Bankruptcy Options for a Small Business: 6 Paths and What Each Leaves Behind

Every bankruptcy path leaves a residue, and the useful way to compare the paths is by what remains afterward. For most owners three things are at stake: the entity itself, the owner's equity in it, and the personal guaranty the owner signed to obtain financing.

The six paths below treat those three things in six different ways. None preserves all three at no cost.

1. Chapter 7 for the Company: The Entity Ends and the Guaranty Stays

An LLC or corporation may file Chapter 7, but Section 727(a)(1) denies a discharge to any debtor that "is not an individual." The company is discharged from nothing. What it receives instead is a trustee, whose first duty under Section 704(a)(1) is to "collect and reduce to money the property of the estate," and whose last is a final account of what was collected and paid out.

Payment follows Section 726: priority claims first, then timely filed general unsecured claims, then late claims, then fines and penalties, then interest, and only after all of that, anything left over "to the debtor." In an insolvent company that last category is a formality.

For the owner, a Chapter 7 case for the company leaves behind an entity that no longer operates, an equity interest that will almost certainly receive nothing, and a personal guaranty that the company's case neither stays nor discharges, since the automatic stay protects the debtor and not the owner who signed beside it, which means the funder or bank that stopped pursuing the company on the petition date may pursue the owner on the guaranty the same week, with nothing in the company's file to prevent it.

The path suits a company that has already stopped, or should, and an owner who wants an independent fiduciary to collect the assets and answer the creditors.

2. Traditional Chapter 11: The Entity Survives If the Votes or the Rules Allow

A confirmed Chapter 11 plan keeps the company alive, and under Section 1141(d)(1) confirmation discharges debts that arose before it. The route there is expensive. The debtor needs a court-approved disclosure statement before soliciting votes, owes the U.S. Trustee a fee each quarter, and must persuade one impaired class or more to accept, with insider votes left out of the count.

A class accepts under Section 1126(c) when the yes votes reach two thirds of the dollars and a majority of the claims that actually voted. If an unsecured class rejects the plan, Section 1129(b)(2)(B) applies. That class must be paid in full or the owners keep nothing on account of their equity.

So the entity may survive while the owner's stake does not. The guaranty survives either way, because Section 524(e) leaves the liability of every other party on a discharged debt intact.

3. Subchapter V: Survival With the Equity Protected

Subchapter V keeps the company alive through a plan, as traditional Chapter 11 does, and lets the owners retain their interests without satisfying the absolute priority rule, provided the plan hands over projected disposable income for a period the court sets between three years and five. Eligibility requires debts within $3,424,000 (the limit in effect since April 1, 2025). Congress has been weighing a bill to restore a higher limit, passed by each chamber in separate versions and still awaiting enactment when this was written in September 2026; counsel should confirm the figure at filing.

The guaranty is outside this case as well.

4. Chapter 13: For the Sole Proprietor, Who Is the Business

Chapter 13 is closed to LLCs and corporations. Section 109(e) admits only an individual with regular income whose noncontingent, liquidated unsecured debts are less than $526,700 and whose secured debts are less than $1,580,125, figures in effect since April 1, 2025 and measured as two separate tests. A sole proprietor qualifies on the same terms as anyone else, because a sole proprietorship is the individual.

Section 1304 treats a self-employed debtor who incurs trade credit as "engaged in business" and lets that debtor keep running the business absent a contrary order. The plan runs three or five years depending on whether the debtor's income is above or below the state median, and each unsecured creditor must receive at least what a Chapter 7 liquidation would have paid.

The residue here is different in kind. There is no entity to preserve and no guaranty to worry about as a separate matter; the owner's business debts are the owner's debts, and the plan treats them together.

5. A Personal Filing for the Guarantor Alone: The Company Is Untouched

An owner can file a personal Chapter 7 or Chapter 13 case to address liability on guaranties while the company stays out of bankruptcy. Section 109(h) requires an individual debtor to complete a credit counseling briefing from an approved agency within the 180 days before filing. The Chapter 7 means test in Section 707(b) applies only where the individual's debts are primarily consumer debts, and business guaranties are generally not incurred for a personal, family, or household purpose, though that classification is a question of fact.

A discharge of the guaranty can be contested. A creditor that alleges the owner obtained the financing with a materially false written statement of financial condition may bring a complaint under Section 523(a)(2)(B), and the court decides it after a hearing.

The company's own debt is untouched. Section 524(e) cuts both ways: a discharge of the owner does nothing to the company's obligation, just as the company's case would do nothing to the owner's. And the owner's membership interest in the company becomes property of the personal bankruptcy estate under Section 541(a)(1), which places the equity within the trustee's reach, to a degree state law governs.

Whether a company whose owner has shed the guaranty remains a company anyone will fund again is a question the Code does not ask.

6. Structured Dismissal: An Exit Without a Plan, and Without a Discharge

In March 2017, in Czyzewski v. Jevic Holding Corp., the Supreme Court described three possible conclusions to a Chapter 11 case: a confirmed plan, conversion to Chapter 7, or dismissal. A dismissal ordinarily tries to restore the financial position that existed before the petition. For cause, the court may alter those consequences, which is what a structured dismissal does.

The Court held that bankruptcy courts may not approve a structured dismissal that distributes money contrary to the ordinary priority rules without the consent of the affected creditors. It did not decide whether structured dismissals are proper in general.

The residue of this path is whatever the parties negotiated, and no discharge.

In Jevic the structured dismissal carried out a settlement reached inside the case, and an arrangement of that kind leaves the company's surviving obligations and the owner's guaranties where the settlement left them.

One Route Outside the Code

For an owner facing a lawsuit it cannot defend, a levy it cannot absorb, or more creditors than any private negotiation could reach, one of the six paths above is probably the answer, and a bankruptcy attorney is the right first call. No settlement arrangement produces an automatic stay.

For a company with a concentrated problem, a few merchant cash advances and a term loan, there is a route that sits outside the Code altogether. Delancey Street negotiates business debt with creditors directly; the company is not a law firm and will not file any of the cases described here, and it brings in licensed attorneys, independent of it, where the work is legal. A confidential first review costs the owner nothing and tests whether the creditors who matter are willing to negotiate.

Each of the six paths is a way of deciding, in advance, which of three things an owner is prepared to lose. The negotiated route asks the same question of the creditors instead.