Should I File Bankruptcy? 8 Questions a Business Owner Should Answer First

Should you file bankruptcy? It depends. There’s a lot that goes into the decision to file for bankruptcy, including a host of variables that are unique to your business and your financial situation. It’s possible that you’d be better off not filing for bankruptcy, but it’s also possible that bankruptcy is exactly what your company needs. Cash flow, tax liabilities, and the type of debt you hold can all influence the answer. Begin by looking at these eight questions.

The very first question to ask yourself when considering bankruptcy is if you intend to keep the business going or if you’d rather close it for good. Filing Chapter 7 bankruptcy is the typical option if you’re looking to close your business. If you want to keep the company open, however, there’s still a range of options.

The legal structure of your company is also a significant factor in determining whether or not to file bankruptcy. If your business is not legally distinct from you, as with many freelancers and sole proprietors, then the owner’s debt and assets are the same as the company’s and the business owner is generally liable for all debt personally. For sole owners who want to close their business, filing a Chapter 7 bankruptcy in their own name after shutting down usually wipes both personal and business debts while giving a fresh start in only three to four months.

By contrast, when a partnership, limited liability company (LLC), or corporation files Chapter 7, the business gets no discharge and there is only an orderly liquidation of assets.

Another important detail is if you have personally guaranteed any business debts. If you have personally guaranteed business debts, the filing of the company bankruptcy alone will not eliminate your liability and so this is an important issue to address even if you intend to liquidate the company. It is very important to understand that the Chapter 13 protection for co-signers only applies for consumer debts. Payroll taxes can also follow you personally. Running payroll can be very tricky, and you can get into a lot of trouble with the IRS when it comes to taxes that were withheld from paychecks but not paid to the IRS. If the IRS cannot collect the money from the business, it may assess those who are responsible for willfully failing to pay a penalty equal to the unpaid trust fund tax, even if the business is still operating.

The amount you owe is an obvious factor when considering whether or not to file bankruptcy, but the types of debt you hold can have a big impact on your decision as well. Debts with collateral backing them, like mortgages and car loans, are called secured debts. Credit cards, medical bills, and others are called unsecured debts. Only individuals can file a Chapter 13 bankruptcy, not LLCs or corporations. Sole proprietors must file bankruptcy under their personal name, not under their business name. Effective April 1, 2025, Chapter 13 is available for debtors with under $1,580,125 in secured debt and $526,700 in unsecured debt. If your secured and unsecured debt totals are above the Chapter 13 bankruptcy limits, or you want to keep running your business, you may be able to reorganize your debts under Chapter 11. If debt is no more than $3.424 million and at least 50% of your debts are from business activities, Subchapter V may be the best route for a debt reorganization.

If you choose to file Chapter 13 bankruptcy, a repayment plan is involved. But Chapter 13 is a longer process than Chapter 7 and repayment can take as much as five years. Your cash flow must be able to support this repayment plan to make Chapter 13 worth it. In Chapter 13, you make monthly payments to a bankruptcy trustee, who pays creditors under the plan. The amount depends on your debts, assets, income and ability to pay.

Subchapter V is a streamlined bankruptcy process for small business debtors to pay a plan over three years, but up to five if needed, from the business’s future income. The court must approve your plan. It can include catch-up payments on missed rent, equipment or bank debt. It suits a business struggling with debt but one that can meet ongoing bills and wants time to catch up on past-due rent and bank loans, or some combination of these things. In an eviction case, bankruptcy might be the only chance to stay in the premises.

In a Chapter 11 bankruptcy the debtor keeps their assets and keeps operating. The debtor proposes a plan to creditors for repayments over time. Chapter 11 can be extremely costly, much more expensive than Subchapter V, and it can take a long time. To file for Chapter 11 bankruptcy, you’ll pay court fees alone of $1,738: a $1,167 filing fee plus a $571 administrative fee.

Subchapter V is also much less complicated than other Chapter 11 bankruptcy filings. Only the debtor may file a plan. There’s also generally no disclosure statement necessary for the court unless one is specifically ordered by the judge. The plan is due 90 days after the bankruptcy is filed, barring a court extension.

Payments You’ve Made over the Past Year

You should look back at payments you’ve made over the past year. The trustee can recover payments made on old debts to outside creditors made within 90 days before filing. This only happens if the business was insolvent and the creditor got more than they would have if they had had to get in line with other creditors in a Chapter 7 bankruptcy. For “insiders” like relatives, the trustee can go back as far as one year. Payments made in the ordinary course of business are typically safe from clawback, and there is a specific exception for smaller transactions.

While bankruptcy can wipe away some debt, it doesn’t work for everything. Some things bankruptcy will not do: discharge debt from actual fraud or a false written financial statement. But even debts like this will not survive if the creditor doesn’t ask the court to make them nondischargeable.

Finally, in order to file bankruptcy, an individual must first get credit counseling from an approved agency within 180 days before filing.

Answering the questions listed above will give you a better picture of whether bankruptcy might be right for you, your business, and your financial situation. In the case of a reorganization under Chapter 11, 13 or Subchapter V, it may be worthwhile if a business can afford a repayment plan. It can be helpful to seek professional guidance from an experienced bankruptcy attorney to help you get a better idea of whether bankruptcy would be the most efficient way to get your business back in financial health.