Chapter 7 When You Own a Small Business: What Actually Happens

How does Chapter 7 actually work when you own a business?

Chapter 7 is liquidation. A trustee is appointed, gathers property that is not exempt, sells it, and distributes the proceeds to creditors according to a statutory priority order (11 U.S.C. § 507). An individual then generally receives a discharge of most remaining pre-filing debts.

The critical split is who files. You, the human being, are one potential debtor. Your corporation, partnership, or LLC is a legally separate potential debtor. The District of Arizona's court materials state plainly that corporations, partnerships and LLCs do not get discharges and are not eligible for Chapter 13, and that such organizations can be represented in court only by a lawyer.

So when an owner says "I'm filing Chapter 7 for my business," they usually mean one of two very different things: filing personally to clear debts they are on the hook for, or putting the entity through a liquidation that produces no discharge for anyone.

• You filing personally: possible discharge of your personal liability, including guaranteed business debts.
• The entity filing: assets are liquidated, no discharge issued, the entity ends.
• Both are possible, and they are not the same case.

What changes the answer for your situation?

Four facts do most of the work. First, your business structure. A sole proprietorship has no separate legal existence — your business debts are already personal debts and your business assets are already your assets. An LLC or corporation is separate, which is why the guarantee question matters so much.

Second, whether you signed personal guarantees. Most small-business lenders, landlords, and equipment lessors require them, which is how an owner ends up personally liable for a debt the entity incurred.

Third, whether the business is still operating. Ongoing operations raise questions a closed business does not — inventory, receivables, employees, and continuing obligations.

Fourth, whether your debts are primarily consumer debts. The presumption-of-abuse machinery in 11 U.S.C. § 707(b)(1) applies to an individual debtor "whose debts are primarily consumer debts." An owner whose debts are mostly business debts sits differently under that provision than a typical consumer filer.

What does federal law say about who can file?

Eligibility starts with 11 U.S.C. § 109. Subsection (a) says only a person that resides or has a domicile, a place of business, or property in the United States may be a debtor. Subsection (b) lists who may not be a Chapter 7 debtor — railroads, various banks and insurance companies, and similar regulated institutions. An ordinary small business is not on that exclusion list.

The word "person" is defined at 11 U.S.C. § 101 to include an individual, a partnership, and a corporation, while excluding governmental units. That is why an entity can be a Chapter 7 debtor even though it will not receive a discharge.

Dismissal and conversion run through 11 U.S.C. § 707. Subsection (a) permits dismissal for cause, including unreasonable delay prejudicial to creditors and nonpayment of required fees. Subsection (b)(1) permits dismissal, or conversion with the debtor's consent, for an individual whose debts are primarily consumer debts where granting relief would be an abuse.

• 11 U.S.C. § 109(a): a place of business or property in the United States is enough of a connection.
• 11 U.S.C. § 101: "person" covers individual, partnership, and corporation.
• 11 U.S.C. § 707(a): dismissal for cause, including nonpayment of fees.
• 11 U.S.C. § 707(b)(1): the abuse analysis, tied to primarily consumer debts.

Where do state or local rules change this?

Two places. Exemptions — what property you can keep — come from state law in most states, and they determine whether tools of the trade, a work vehicle, or business equipment stays with you or goes to the trustee. Those amounts vary substantially, and we publish them on the state pages rather than restating them here, because a number that is right in one state is wrong in the next.

The second place is your district's local rules and filing requirements. Districts publish their own document checklists and local rules; the Western District of Kentucky, for example, publishes a filing-requirements page listing every schedule a case needs, and marks which items are required even for a skeletal or emergency filing. The Eastern District of Virginia's local rules run to their own separately published volume.

Neither of these changes the federal eligibility rules above. They change what you file, where, and what you keep.

• Exemption amounts: state-specific, and decisive for business equipment and vehicles.
• Local rules and required-document checklists: district-specific.
• Which court is yours: determined by district and division.

What does this look like in practice?

Consider a two-person landscaping company organized as an LLC. The LLC owes a supplier, owes a truck lender, and owes rent. The owner personally guaranteed the truck loan and the lease but not the supplier account.

If the owner files Chapter 7 personally, the guaranteed truck and lease obligations are debts of the owner and are treated as such in the case. The supplier's claim against the LLC is not the owner's debt, so the owner's personal case does not resolve it — the supplier's remedy remains against the entity.

The owner's membership interest in the LLC is property the trustee looks at, along with any equipment titled to the owner personally rather than the company. The Maryland bankruptcy court's overview describes the mechanic bluntly: the debtor files a petition and schedules listing assets, income, liabilities, and creditors, and the filing automatically stays debt-collection actions, including wage garnishments and collection calls, while it remains in effect.

What documents and information will you need?

An individual case runs on the official forms. Court filing checklists consistently list the voluntary petition (Form 101), Schedule A/B for property, Schedule C for property claimed as exempt, Schedules D and E/F for secured and unsecured creditors, Schedule G for executory contracts and unexpired leases, Schedule H for codebtors, Schedules I and J for income and expenses, the Statement of Financial Affairs (Form 107), the creditor mailing matrix, and a certificate of credit counseling completed before filing.

Schedule G and Schedule H matter more than usual for an owner. Leases and equipment contracts belong on G, and a business partner or spouse who co-signed belongs on H.

Exemptions are not automatic. The Southern District of Iowa's instructions state it directly: to exempt property you must list it on Schedule C, and if you do not list it, the trustee may sell it and pay the proceeds to your creditors.

• Business bank statements, receivables, and an inventory of equipment and who holds title.
• Every lease and equipment contract, for Schedule G.
• Anyone who co-signed or guaranteed alongside you, for Schedule H.
• Recent tax returns and profit-and-loss records for the business.

What do the filing fees come to?

Fees are set nationally, not by your district. A Chapter 7 case carries a $245 filing fee (28 U.S.C. § 1930(a)(1)(A), (f)(1)), a $78 administrative fee (Bankruptcy Court Miscellaneous Fee Schedule, Item 8, effective December 1, 2023), and a $15 trustee surcharge (Bankruptcy Court Miscellaneous Fee Schedule, Item 9, effective December 1, 2023) — the total the Eastern District of Louisiana's Chapter 7 packet shows as $338.

For comparison, a Chapter 13 case carries a $235 filing fee (28 U.S.C. § 1930(a)(1)(B)) plus the same $78 administrative fee. Note the statute permits installment payment for an individual commencing a voluntary or joint case, and that the Chapter 7 fee waiver under § 1930(f) is conditional rather than automatic.

Attorney fees are separate and are not set by the court. Under 11 U.S.C. § 527, a debt relief agency must give an assisted person written disclosures, and the required statement tells you to ask to see the written contract specifying what will be done and how much it will cost before hiring anyone.

Is Chapter 13 or Subchapter V worth asking about instead?

Sometimes, and the distinction is worth knowing before you talk to a lawyer. Chapter 13 is for individuals, and 11 U.S.C. § 1304 expressly contemplates a debtor engaged in business: a self-employed debtor who incurs trade credit in the production of income is "engaged in business," and unless the court orders otherwise may continue operating it. The Western District of Kentucky states that a person operating a small business as a sole proprietor may file Chapter 13, but a corporation or partnership may not.

Chapter 13 also carries a codebtor stay under 11 U.S.C. § 1201-style provisions for consumer debts, with an express carve-out where the codebtor became liable in the ordinary course of that individual's business.

For an entity that needs to reorganize rather than liquidate, Subchapter V of Chapter 11 exists, with its own eligibility tests and duties (11 U.S.C. §§ 1116, 1187, 308). Debt limits there have changed repeatedly, so treat any figure you read as needing a current check.

• Chapter 13: individuals only, including sole proprietors; entities are excluded.
• Chapter 7 for an entity: liquidation without a discharge.
• Subchapter V: a reorganization route for a qualifying small-business debtor, with reporting duties.

What should you ask a lawyer?

Bring specifics, not a summary. The questions that change the answer most for an owner are narrow and factual, and a lawyer can answer them quickly once they see the documents.

Ask whether your business assets are titled to you or to the entity, because that determines whether the trustee reaches them through your personal case. Ask which of your debts you personally guaranteed, and get the documents rather than relying on memory. Ask whether your debts are primarily consumer debts, since that drives the § 707(b)(1) analysis. Ask what happens to your ownership interest in the entity. Ask whether continuing to operate during the case creates a problem.

The court materials are consistent that the clerk's office cannot give legal advice, and the Northern District of Georgia's SBRA guidance and other district publications assume counsel for business cases. For an entity, representation by a lawyer is generally required.

• Are the tools, vehicles, and equipment titled to me or to the company?
• Which debts did I personally guarantee, and where are those documents?
• Are my debts primarily consumer or primarily business?
• What happens to my membership or shareholder interest?
• Should the entity file at all, or simply wind down outside bankruptcy?

Frequently asked questions

Can my LLC file Chapter 7 and get its debts wiped out?

No. An LLC can be a Chapter 7 debtor, but the District of Arizona's court guidance states that corporations, partnerships, and LLCs do not receive discharges. The case liquidates the entity's assets and distributes proceeds to creditors; it does not erase anything. Debts you personally guaranteed remain yours regardless of what happens to the entity.

I'm a sole proprietor. Do I file one case or two?

One. A sole proprietorship is not a separate legal person, so there is no second debtor to file for. Your business debts are already your personal debts and your business property is already your personal property, listed on Schedule A/B and claimed as exempt on Schedule C if an exemption covers it.

What happens to business debts I personally guaranteed?

They are treated as your personal debts in your individual case. That is generally why owners of otherwise separate entities end up in personal bankruptcy at all. The guarantee converts the entity's obligation into yours, so it is scheduled and handled like any other personal liability, subject to the usual exceptions to discharge.

Will filing stop a creditor from garnishing my wages?

Filing a petition generally triggers an automatic stay. The District of Maryland describes it as automatically preventing debt-collection actions against the debtor and the debtor's property: while the stay remains in effect, creditors cannot bring or continue lawsuits, make wage garnishments, or make collection calls. Exceptions and relief motions exist, so this is not absolute.

Can I keep running the business while my case is pending?

It depends heavily on the chapter and the facts. Under 11 U.S.C. § 1304, a Chapter 13 debtor engaged in business may operate it unless the court orders otherwise, subject to limitations. Chapter 7 is a liquidation, so continued operation raises different questions about what belongs to the estate. Discuss this before filing, not after.

How much does a Chapter 7 case cost to file?

The court fees are a $245 filing fee, a $78 administrative fee, and a $15 trustee surcharge, which the Eastern District of Louisiana's packet totals as $338. Attorney fees are separate and vary. Under 11 U.S.C. § 527 you are entitled to a written contract stating what will be done and what it costs before you hire anyone.

Does the means test apply to me if my debts are business debts?

The 11 U.S.C. § 707(b)(1) abuse analysis applies to an individual debtor whose debts are primarily consumer debts. An owner whose debts are mostly business debts sits differently under that provision. Whether your debts are primarily consumer is a factual determination worth confirming with a lawyer before you assume either way.

Sources

• 11 U.S.C. § 109 — Who may be a debtor · official source
• 11 U.S.C. § 101 — Definitions · official source
• 11 U.S.C. § 707 — Dismissal of a case or conversion to a case under chapter 11 or 13 · official source
• 11 U.S.C. § 507 — Priorities · official source
• 11 U.S.C. § 1304 — Debtor engaged in business · official source
• 11 U.S.C. § 1201 — Stay of action against codebtor
• 11 U.S.C. § 527 — Disclosures · official source
• 11 U.S.C. § 1116 — Duties of trustee or debtor in possession in small business cases
• 11 U.S.C. § 1187 — Duties and reporting requirements of debtors
• 11 U.S.C. § 308 — Debtor reporting requirements
• U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter: What can Bankruptcy do for you? What will it do to you?
• Bankr. D. Md. official page — Legal Overview
• Bankr. E.D. La. official guidance — Chapter 7 Form Packet
• Bankr. S.D. Iowa official guidance — Instructions - Bankruptcy Forms for Individuals
• Bankr. W.D. Ky. official guidance — Chapter 13 Filing Requirements
• Bankruptcy Court Miscellaneous Fee Schedule, Item 8
• Bankruptcy Court Miscellaneous Fee Schedule, Item 9
• 28 U.S.C. § 1930(a)(1)(A), (f)(1)
• 28 U.S.C. § 1930(a)(1)(B)

Related

• Build your personalised roadmap
• Chapter 7
• Chapter 13
• Exemptions: what they protect
• Find your local bankruptcy court
• Which debts get discharged