What You Need to Know About Business Bankruptcy

Whether it is a small, local sole-proprietorship, or a large corporation, businesses often file a bankruptcy case as the last option. If a business is going under, whether it be from mismanagement or more often from a down market or a lawsuit, the business owner is filing bankruptcy because of his or her inability to pay back a debt or more than one debts or to continue business operations in the face of insufficient income.

Bankruptcy law can be an overwhelming and complex topic to understand. There are many things to consider and many different reasons why a business files bankruptcy. Here is a short guide to help you better understand business bankruptcy and whether it is an option for you, but you should definitely consult with an experienced bankruptcy attorney to discuss your particular situation.

What is Bankruptcy?

Bankruptcy is a legal process that allows individuals and businesses to restructure or discharge their debt. Bankruptcy is often filed by a business owner who has no means of repaying debt. Bankruptcy will either discharge a debt or will create a payment plan for business owners to pay back creditors over time

Two different outcomes are possible for businesses large and small depending on the kind of bankruptcy that was filed. There are 6 kinds of bankruptcy, but only three that deal specifically with businesses filing for bankruptcy.

Three Questions You Must Answer Before Filing Any Type of Business Bankruptcy

1.   Do you intend to liquidate or continue business operations?

2.   Are you personally liable for any business debt?

3.   How is your business structured?

The answers to these questions will dictate which form of bankruptcy is appropriate for you and your business, and for your goals in filing bankruptcy.

There are 3 Types of Business Bankruptcy

Chapter 11 Business Bankruptcy

In general, it is LLPs, LLCs, and Corporations that file Chapter 11. Chapter 11 is the only type of business bankruptcy for these types of businesses that allow operations to continue.  A Chapter 11 business debtor will file a plan of reorganization which will propose a restructuring of debt and payment of debt over time. Creditors will have the opportunity to object to the plan and negotiate different treatment under the plan.

Chapter 13 Business Bankruptcy

Chapter 13 business bankruptcy is only available to sole proprietors. It works much the same as Chapter 11 but the sole proprietor can also reorganize personal debt and be discharged of personal unsecured debt.  Again, sole proprietors can continue business operations following closure of their bankruptcy case.

Chapter 11 is rarely filed by sole proprietors because Chapter 13 is more streamlined and has fewer requirements.

Chapter 7 Business Bankruptcy

The most important thing to know about Chapter 7 is that a Chapter 7 business debtor must cease business operations. Chapter 7 is a liquidation process by which unsecured debt is discharged, and business assets are seized and sold by the Chapter 7 Trustee for the benefit of the business’ creditors.

Be advised: If a business files Chapter 7 and is organized as anything but a sole proprietorship, and the business owner personally guaranteed any business debt, the business owner will remain liable for that debt following the closing of the bankruptcy case.


Business bankruptcy law can be complex. Any business owner considering filing bankruptcy should consult with an experienced bankruptcy attorney to ensure that your goals are fully realized.

About the author:

Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia.  She frequently works with David. Offen, Esq. a busy Philadelphia bankruptcy lawyer.

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