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Small Business Bankruptcy

Many clients ask whether filing bankruptcy is a good fit for their small business. They’re worried about creditors coming after them individually or concerned about the risks of filing for their business in general. Below we are going to cover the some of the basics you’ll need to know before filing for bankruptcy with your small business, specifically the differences between Chapter 7, Chapter 11, and Chapter 13 filing.


Firstly, lets give you a broad overview of the process. When filing for bankruptcy this doesn’t mean you’ll never get your credit score back. Or that you won’t be able to do things like buy a house, get a loan, lease or buy a car, etc. Nor does it mean that your business is finished, or that you’ll never be able to start a new one. Some people worry that by filing for bankruptcy their financial lives cease, full-stop. This is partly true! By filing you do put a stop on your debt. What this means is that creditors are no longer allowed to call and harass you or your small business until the bankruptcy court approves a plan, and even after this they’re limited to only reaching out to your attorney as required by the Fair Debt Collection Practices Act (FDCPA). By filing for bankruptcy, you are given breathing room to get ahead of your debt, discharge those that are eligible, and finally make payments without the feeling of helplessness.

Chapter 7

Your small business might be best suited for a Chapter 7 filing, it just depends on the circumstances surrounding your business. For instance, by filing a Chapter 7 small businesses can help their financial situation by taking advantage of bankruptcy laws which enable them to begin the dissolution process. What does this mean? In broad strokes this means that the company will be broken down and assets will be sold.

Contrary to, say, a Chapter 11 filing, there is no reorganization of the business. It is effectively shut-down, for lack of better phrase. However, many people with small businesses grow concerned that by filing in a Chapter 7 they’ll never be able to engage in the same or similar commercial enterprise. This is not true! Only the company, the entity, goes through dissolution, not you the individual.

When is Chapter 7 filing a good fit? Well, it depends, but if you’re in a position where you have no ability to pay your debts, your accounts receivables are more of a liability than an asset, and/or you see the industry itself taking a further downturn then a Chapter 7 filing might be right for you.

Chapter 11

If you read the Chapter 7 explanation above and felt it wasn’t right for you or your small business, then there’s a good chance that you might be better served with a Chapter 11 filing. Unlike a Chapter 7, when a business files for a Chapter 11 they go through a reorganization process. What’s this look like? Well to start, the bankruptcy court and your attorney might have you sell some of your assets in order to pay creditors with secured debts, or perhaps debts that have priority. In addition, in a Chapter 11 you, the business owner, get to come up with and propose your plan (with the help of your attorney) to the court. Note, however, that you need an attorney that’s familiar with this process as filing for a Chapter 11 may result in your creditors, and not you, proposing a plan to the court. In addition, while some individuals/owners can file a Chapter 7 or 13 for bankruptcy on their own, it’s highly advised you do not do this for a Chapter 11.

Chapter 13

Chapter 13 filings, in relation to your small business, are best left to very small businesses like an LLC with limited employees. The reason for this is that under a Chapter 13 plan you, the business owner, still have an income that’s positive in relation to your debt, but you just need a little wiggle room to keep your doors open so that you can continue to pay those debts without having to go through any drastic changes.

If you find yourself worrying needlessly over your business in relation to debts on past due accounts and have a steady income to address these obligations but no way to structure it, then a Chapter 13 bankruptcy might be the best fit for you.


Understand, much of what’s provided here is very broad overview surrounding small business filings in bankruptcy courts. Fortunately, there are many qualified attorneys that focus in this area, have reasonable fees, and are extremely competent in what they do. Rather than risk the possibility of shutting down your business, selling off assets without anything to show for it, or firing employees because of outstanding debt, we recommend first getting with a professional to discuss your options. Most attorneys offer free consultation, like us here at Herrin Law, and are more than happy to help you and small business navigate this difficult and uncertain time.