The COVID-19 pandemic is wreaking havoc on small businesses.
“Mom and Pop” stores and other small businesses are the most affected and least likely to survive the downturn in business.

Employees are being laid off, businesses are closing, and vendors of  businesses are losing their businesses.

These are difficult times to be sure.

When faced with this reality,  what steps can you take to recover?

Especially when the problems thrust upon you by circumstances are beyond your control.

Small businesses have the following bankruptcy options:

Corporations and Partnerships (LLCs, LLPs, Incs)Chapter 7 and Chapter 11 

Individuals/Sole ProprietorshipsChapter 7, Chapter 11 and, possibly Chapter 13.


Broadly, Chapter 11 is a reorganization, for entities trying to stay in business.

Chapter 7 is a liquidation of assets, when the business is terminating.

Chapter 11 Options For Corporations (Staying In Business)

If staying in business is the goal, Chapter 11 may be the best option for a corporation to restructure its debts.

At its core, Chapter 11 is designed to give a business time to negotiate with and propose a repayment plan to its creditors.

Standard Chapter 11 Case

The key features of Chapter 11 are:

  • The Automatic Stay (present in all bankruptcy cases)- Once the case is filed, all creditor collection efforts must stop due to the automatic stay that goes into effect.
  • Debtor Remains In Control-The corporation remains in control of the business and acts as a “debtor-in-possession” (trustee) for the benefit of its creditors, unless and until it becomes necessary for the court to appoint a separate Trustee. [pullquote]See More On Chapter 11 Bankruptcy[/pullquote]
  • Ability To Reject Existing Contracts and Leases- You can legally terminate burdensome leases and contracts
  • Time To Propose A  Disclosure Statement and Repayment Plan-The corporation then has a limited amount of time to propose a repayment plan that can be approved by the court.  There are numerous requirements for getting plan approval and it is very involved.  The bottom line is that it usually requires negotiations with creditors to get a sufficient number of votes. The amount to be repaid depends on the value of assets, types of debts, and to what the creditors will agree.

Small Business Subchapter V of Chapter 11

There is a new “subChapter” of Chapter 11 called “Subchapter V” designed especially for small businesses.

In order to qualify for this Subchapter, you must be:

  • A person or entity engaged in business or commercial activities, except that of owning a single asset real estate
  • Have total actual (liquidated, noncontingent) secured and unsecured debts totaling less than $7.5 million and not less than 50% of the total debt must have come from the business or commercial activities.

There are several benefits to Subchapter V of Chapter 11 case in addition to those of a regular Chapter 11.  Among these are:

  • Similar to a Chapter 13 case (for individuals), creditors cannot prevent approval of the repayment plan as long as the debtor pays all their disposable income into the plan for a period of 5 years, and meets other plan confirmation requirements.
  • The owners of the corporation can retain their interest in the company without having to contribute substantial “new value” toward the reorganization plan.
  • Supposedly less paperwork and legal fees required than a standard Chapter 11 case.

B.  Chapter 7 Options For Corporations (Going Out Of Business)

If you are terminating your business, Chapter 7 is a possibility.  However, it is never a legal necessity to file Chapter 7 for a corporation.

Corporations do not receive a discharge of debts in Chapter 7.  This means that after the bankruptcy case is over, the creditors of the corporation can sue the corporation.   Then seek to collect from whatever assets are available (if there are any).

Usually this is a “who cares?” scenario.

In other words, what difference does it make if a creditor sues the corporation and gets a judgment?  Unless there are personal guarantees or personal liability for the corporate debts, all creditors can do is seek to collect against whatever assets remain and once they are gone, there’s nothing left to do.

However, what Chapter 7 can do, is provide for an independent Trustee appointed to liquidate (sell) any assets and then pay creditors to the extent possible from those assets, according to their statutory priority in the Bankruptcy Code.

Doing this accomplishes several things:

  • It removes the obligation of doing so from the officers of the corporation;
  • It eliminates liability of the corporate officers for selling assets at their highest value and for preferring one creditor over another when disbursing payments;
  • It enables third parties (such as a newly formed corporation) to purchase needed assets from the bankrupt corporation to use in the new business.   This can be a very important step to prevent successor liability to the new business.

Frequently the big issue faced by corporate owners when a business fails is personal liability for corporate debts, usually due to personal guarantees or trust fund taxes (such as sales taxes or employee payroll taxes).

Bankruptcy For Sole Proprietorships and Individual Businesses

Individuals who run their own businesses as self-employed can avail themselves of any of the bankruptcy chapters, if eligible.

If you wish to try and salvage your business, Chapter 13 would be the first place to start.

Chapter 13 For Individuals

Chapter 13 allows you to continue operating your business while discharging your debts after doing a payment plan.

The payment plan can pay anywhere from 0% to 100% of your debts (with zero percent interest!).

The amount of payment depends on:  [pullquote]See More On Chapter 13 Bankruptcy Options[/pullquote]

  • The value of your assets (and exemptions available for those assets)
  • Your disposable income (as defined by the Bankruptcy Code)
  • Amount of debts which must  be paid 100% (for example, domestic support arrears, mortgage arrears, certain tax debts, and others)

Chapter 13 does have restrictions on eligibility.  You must have less than $419,275 of unsecured debt and $1,257,850 of secured debt*

Chapter 7 For Individuals

Chapter 7 will enable you to discharge any dischargeable debts without having to make any payments.  The trade-off is that you have to give up any “non-exempt” assets that you have.

Exemptions are statutory protections for assets and vary depending on where you have lived for the 2 years prior to filing your bankruptcy case.  [pullquote]See More on Bankruptcy Exemptions[/pullquote]

If your debts are more than 50% related to your business, then qualifying for Chapter 7 is easier than otherwise.   In business cases, your income level is not as important a determining factor.


The above is merely a very light summary of the different features and benefits of the various Chapters.

The only way to determine your eligibility and which, if any, bankruptcy option to use is to have a consultation with an experienced bankruptcy attorney in your area.


*As of April 2020. This amount changes every 3 years.

“Sign of the Times” by stephenyeargin is licensed under CC BY-SA 2.0