Bankruptcy for an LLC: 6 Rules That Differ From Personal Bankruptcy

An LLC that files for bankruptcy enters a courthouse designed around human debtors, and several of its rooms are locked to the company. The Bankruptcy Code grants its best known remedy, the discharge, on terms that turn on whether the debtor is an individual. An LLC is not one. Owners who remember a personal case tend to carry it into the company's decision, and the borrowed template misleads in at least six places.

The six rules below concern bankruptcy for an LLC as a separate legal person: what the entity can obtain, what it cannot, and where its members stand while the company's case proceeds. None of it replaces bankruptcy counsel, which, as the third rule explains, the company must have in any event.

1. Chapter 7 Ends the Company Without Forgiving It

Section 727(a) instructs the court to grant a discharge unless one of several conditions applies, and the first condition is five words long: "the debtor is not an individual." Read the text of 11 U.S.C. 727(a)(1) and the consequence requires no interpretation. An LLC may file under Chapter 7. It receives no discharge.

The case still performs work. A trustee collects the company's property and reduces it to money, investigates its financial affairs, and pays claims in the order section 726 prescribes, priority claims before general unsecured ones. When the estate closes, the LLC retains its unpaid balances and nothing with which to pay them. The debts were never forgiven. They outlive the business on paper, attached to a shell with an empty bank account.

Two familiar burdens of personal bankruptcy fall away for the same reason. The credit counseling briefing that section 109(h) requires within the 180 days before filing is written for "an individual," and the means test in section 707(b) reaches only individual debtors whose debts are primarily consumer debts. The company takes neither. An owner who later files a personal case over a guaranty inherits both questions again.

2. Chapter 11 Can Discharge an LLC, Unless the Plan Is a Liquidation in Disguise

Confirmation of a Chapter 11 plan does what Chapter 7 will not. Under section 1141(d)(1), confirmation "discharges the debtor from any debt that arose before the date of such confirmation," whether or not the creditor filed a claim or voted for the plan, subject to the exceptions in the subsection, the plan, and the order. For an LLC with an operation worth preserving, that sentence is the reason LLC Chapter 11 cases exist. The company continues to run its business as debtor in possession under sections 1107 and 1108, proposes a plan, and emerges with its prepetition obligations replaced by the plan's terms.

Section 1141(d)(3) withholds the discharge when three conditions coincide: the plan liquidates all or substantially all of the estate's property, the debtor does not engage in business after consummation, and the debtor would be denied a discharge under section 727(a) if the case had been filed under Chapter 7. Every LLC satisfies the third condition from the moment it is formed, because 727(a)(1) already denies entities a Chapter 7 discharge, which means that an LLC which sells its assets through a Chapter 11 plan and then stops operating (a path some owners describe, not quite accurately, as the dignified version of Chapter 7) arrives at the same place on the discharge question as the company that filed Chapter 7 on the first day, with the only difference being the route and the procedural burdens that came with it.

The discharge is a promise made to a going concern about its future. A company with no future gives the promise nothing to protect.

Subchapter V, the small business track within Chapter 11, alters the timing. After a consensual confirmation under section 1191(a), the ordinary discharge in 1141(d) applies. After a confirmation over creditor objection under 1191(b), section 1192 postpones the discharge until the debtor completes the payments due within the first three years of the plan, or a longer period the court fixes, not to exceed five. The same section excepts debts "of the kind specified in section 523(a)," and how that exception applies to an LLC rather than a person is a point to raise with counsel before any projection relies on it.

In 2024 the temporary $7.5 million Subchapter V ceiling lapsed, leaving $3,424,000 (the figure in effect since April 1, 2025). The Senate and House have passed separate versions of the Bankruptcy Threshold Adjustment Act of 2026 to restore a higher limit, neither law as of late September 2026, so counsel should confirm the figure when the petition is prepared.

3. The Company Cannot Appear Without a Lawyer

A person may file bankruptcy pro se. An LLC may not. The Supreme Court in Rowland v. California Men's Colony (1993) described it as settled "for the better part of two centuries" that a corporation "may appear in the federal courts only through licensed counsel," and the federal judiciary's instructions for non-individual filers state the rule in one line: "Non-individual debtors must be represented by an attorney."

A member therefore cannot sign the petition alone and see what follows. No settlement company can file it either.

4. The Members' Guaranties Stay Where They Were Signed

The automatic stay under section 362(a) protects the debtor and the property of its estate. The Second Circuit in Queenie, Ltd. v. Nygard International (2003) treated it as well established that the 362(a) stay is limited to debtors and does not extend to co-defendants who have not filed, reserving a narrow exception for claims whose pursuit would have an immediate adverse economic consequence for the estate. The owner who signed a personal guaranty for the company's merchant cash advance, equipment lease, or bank line is, for these purposes, exactly such a co-defendant.

Three weeks after the LLC's petition, a funder barred from pursuing the company may, in the ordinary case, still be pursuing the guarantor. If the company later obtains a discharge in Chapter 11, that discharge belongs to the company. Section 1141(d) contains no language releasing a separate obligor who promised to pay if the company did not, and a court's willingness to extend the stay to a non-debtor, where it exists at all, arrives by motion and not by default.

The owner's exposure is addressed, if it is addressed at all, through a personal case, a negotiated release, or a defense to the guaranty itself.

5. A Single-Member LLC Can Sit Inside Two Estates

When the individual who owns an LLC files a personal case, the membership interest goes with the individual. Section 541(a)(1) places in the estate "all legal or equitable interests of the debtor in property as of the commencement of the case," and section 541(c)(1) brings such an interest in notwithstanding any provision in an agreement or in nonbankruptcy law that restricts its transfer or forfeits it upon a bankruptcy filing. The clause in the operating agreement declaring that a bankrupt member ceases to be a member does not keep the interest out of the member's estate.

What the member's trustee may then do with that interest, whether to vote it, sell it, or collect distributions from it, depends on state LLC statutes and on case law this page does not attempt to summarize, and it deserves an early conversation with counsel. The company's own assets do not become the member's. The LLC's delivery van remains the LLC's delivery van.

Only the interest moves.

6. The Operating Agreement Authorizes the Filing, Not the Owner's Wish

An individual decides to file by deciding. An LLC decides through the process its governing documents and state law prescribe, and the bankruptcy court asks about it. The Supreme Court in Price v. Gurney (1945) held that authority to file for a corporation "finds its source in local law," and that where those purporting to act have not been granted that authority, the court "has no alternative but to dismiss the petition." The case arose under the former Bankruptcy Act, and courts continue to apply its rule; the current Official Form 201 petition requires the signer to declare under penalty of perjury, "I have been authorized to file this petition on behalf of the debtor."

In a company with two members and an agreement requiring unanimous consent for a bankruptcy filing, the smaller member holds a veto. The agreement decides this. The member with the most money at stake does not.

Where a Settlement Review Fits Beside These Rules

Delancey Street is a debt settlement company, not a law firm. Filing the petition, appearing before the judge, and advising on the rules above all belong to counsel. Its work sits on the other side of the decision: a free, confidential initial review of whether an LLC's merchant cash advance and related business debts can be resolved by negotiation, with independently licensed counsel coordinated for any matter that requires a lawyer. Some companies belong with bankruptcy counsel first, including an LLC with a viable operation facing a creditor that will not negotiate, and an honest review should say so.

The LLC was formed to keep the owner's affairs apart from the company's debts. Bankruptcy is the one proceeding that tests that separation from both sides at once.