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

Bankruptcy is a poor answer to a cash problem and a serviceable answer to a claims problem, and most owners who ask the question cannot yet say which one they have. The eight questions below are an attempt to find out before a lawyer's clock starts, not a substitute for the lawyer.

None of them is answered by the size of the debt alone. Several are answered by documents the owner already has in a drawer.

1. The Business Must Earn Money Before Debt Service

A reorganization plan can be confirmed only if confirmation "is not likely to be followed by the liquidation, or the need for further financial reorganization," a standard written into 11 U.S.C. 1129(a)(11). Courts call this feasibility. Owners should call it the first question.

Take a hypothetical café collecting $22,000 a month against $19,500 in rent, payroll, food and utilities. Before any financing, it clears $2,500. If three advances debit a combined $1,100 on each of 21 banking days, the debits alone reach $23,100 a month, which is more than the café takes in. That café has a debt problem sitting on top of a small but real operating profit, and the law has tools for that. A café whose costs exceed its receipts before a single advance is debited has a different problem, one that begins as a question about the Code and ends, if the owner follows it honestly, as a question about the menu, the lease and whether the neighborhood still eats out. No chapter repairs that.

2. Secured and Unsecured Creditors Are Different Conversations

A creditor with a valid, perfected security interest holds rights a general creditor lacks. If a funder or lender holds an interest in receivables or deposit accounts, the business's incoming cash may be "cash collateral," and section 363(c)(2) forbids a debtor to use it unless every entity with an interest consents or the court, having heard the objections, permits it. Whether a particular merchant cash advance created such an interest depends on the contract and the filing, and no one should assume the answer in either direction.

Secured claims also resist being compromised. In a Chapter 11 cramdown, a dissenting secured class keeps its lien and receives payments with a present value at least equal to its collateral, which is a heavier obligation than most owners expect.

3. Whoever Signed Personally Is Still Exposed

The automatic stay protects the debtor. In Queenie v. Nygard the Second Circuit repeated that section 362(a) stays are limited to debtors and do not ordinarily extend to others who have not filed. An LLC that files leaves its guarantor where the guarantor stood the day before: liable, and suable.

An owner with guaranties may therefore be weighing two filings, or one filing and one negotiation, rather than a single decision.

4. A Levy Already in Motion Changes the Calendar

A New York judgment creditor can freeze a bank account with a restraining notice under CPLR 5222 and then levy through the sheriff, and under CPLR 5232 the bank that is served must transfer the property to the sheriff. A bankruptcy petition stays, under section 362(a)(2), the enforcement of a prepetition judgment against the debtor or against property of the estate.

Ninety days after a levy, the statute says, the levy "shall be void except as to property or debts which have been transferred or paid," subject to extension. Those two clocks, the creditor's and the owner's, run at the same time, and an owner who learns of a restraint on a Tuesday is making a filing decision on a Tuesday whether or not the owner feels ready to make it.

5. Payments From the Last Ninety Days Can Be Reopened

A trustee, or a debtor in possession exercising a trustee's powers, may avoid a transfer made to a creditor on account of an old debt, while the debtor was insolvent, within 90 days before the petition (one year for insiders), if the creditor came out ahead of a Chapter 7 distribution. That is the preference rule in 11 U.S.C. 547, and it carries defenses, including one for payments in the ordinary course and a floor under which transfers in a business case cannot be avoided, $8,575 as adjusted April 1, 2025.

Whether a merchant cash advance remittance is payment on a debt or the delivery of purchased receivables is contested, and this page takes no position on it. The practical question is narrower. A lump sum paid to one funder in the weeks before filing, so that the funder would release a guaranty, is the kind of transfer the statute was written to examine.

What an owner did in the last three months matters about as much as what the owner owes.

6. Tax Debts Follow the Owner Out of the Company

Withheld payroll taxes are held in trust for the government. Under 26 U.S.C. 6672, a person responsible for collecting and paying them who willfully fails to do so is liable for a penalty equal to the unpaid trust fund amount, and the IRS says willfulness requires no bad motive; paying other bills instead can be enough. The company's bankruptcy does not erase that personal exposure. For an individual, section 523(a)(1)(A) excepts from discharge taxes of the kind given priority in section 507(a)(8), which includes a tax "required to be collected or withheld and for which the debtor is liable in whatever capacity."

The owner who kept the advances current by skipping deposits (a choice that feels, in the moment, like paying the loudest creditor first, and that the IRS offers, in its own guidance on the penalty, as an example of the willfulness that creates personal liability) has usually made the bankruptcy question harder without knowing it.

7. A Negotiated Exit Depends on Who Will Negotiate

Settlement outside court needs creditors willing to agree. There is no stay, no class vote to bind a holdout, and no judge to approve the result. For a business with a few creditors and a stack of advances, that can be enough. For a business with twenty creditors and one who will not talk, it usually is not. You can settle with the four who answer the phone and still be sued by the fifth.

Canceled debt can also be taxable income, the IRS explains, with exclusions for bankruptcy and insolvency that have their own requirements. The comparison between routes has to include the tax line.

8. What the Owner Intends to Keep

An LLC or corporation in Chapter 7 receives no discharge, because section 727(a)(1) grants one only to individuals, and whatever remains after creditors are paid goes last "to the debtor." In a traditional Chapter 11, the absolute priority rule keeps owners from retaining their equity over a dissenting unsecured class that has not been paid in full.

The owner who wants to keep the company and the owner who wants to be finished with it are asking the same question with opposite answers in mind.

Subchapter V relaxes that rule for debtors with no more than $3,424,000 in qualifying debts (the figure adjusted April 1, 2025; Congress had passed differing versions of a bill to raise it without final enactment as of September 27, 2026, so counsel should confirm the current limit). An owner who wants to keep the business is often, in practice, asking whether the company fits under that figure.

After the Eight Answers

An owner who has worked through these questions can hand counsel a sharper file. Where the answers point to a court, the owner needs a bankruptcy lawyer, and a settlement company should say so. Where they point to a few creditors willing to talk, Delancey Street reviews merchant cash advance balances without charge and in confidence; it is a settlement company, not a law firm, and it does not advise whether to file. Its attorneys are outside counsel, licensed on their own.

The drawer holds most of the answers. It usually has for some time.