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Do you own a small business buried in credit card debt? Don’t stress! This buying guide has key tips for filing paperwork and protecting the things your company owns. It also compares how Chapter 7 and Chapter 13 bankruptcy work. It’s really important to learn the facts before dealing with bankruptcy. More than 200,000 U.S. businesses file for bankruptcy each year. That number comes from 2023 studies by SEMrush and the American Bankruptcy Institute. This guide gives you free expert advice and the best price options. Take action today to protect your future and keep your business from failing.
Filing tips
Did you know over 200,000 U.S. small business owners file for bankruptcy every year? The bankruptcy process is extra hard for people who run their business entirely on their own. These filing tips will help you get through these tough times.
Initial steps
Understand different bankruptcy types
Chapter 7 bankruptcy is the most popular choice for solo business owners. It is also called liquidation bankruptcy. It can wipe out debts like medical bills and credit card balances. It can erase personal loans in just three to four months, per a 2023 SEMrush study. John was the only owner of a failing retail business. He decided to file for Chapter 7 bankruptcy. His debts that weren’t tied to property he owned were erased after the process. That let him start over completely fresh. Chapter 7 might be an option for you if most of your debts are not tied to property and you own very few valuable things. The Bankruptcy Law Center recommends you understand every option before you make your decision.
Conduct comprehensive financial review
If you run a small business all by yourself, there’s a key step before filing for bankruptcy. You have to look closely at all of your money details. That includes things you own, money you owe, and the cash you earn regularly. Doing this full review will help you pick the best type of bankruptcy for you. If you have valuable business items you want to keep, Chapter 13 might be the best choice. It lets you hold onto your property while you catch up on missed payments. That covers house loans, car loans, and other debts you can’t get wiped away. The first step to making any bankruptcy choice is that full review of your finances. You can ask a bankruptcy lawyer or accountant to help you through the whole process.
Prepare for means test (if applicable)
If you’re looking into filing for Chapter 7 bankruptcy, you first need to take a means test. This is required if most of your debt is regular consumer debt. Passing the test lets you erase any qualifying debts you owe. The test checks if you make enough money to pay back your debts. You’ll have to calculate your income on two official bankruptcy forms. Those forms are the Chapter 7 means test form and Schedule I Your Income. This step is easier if you’re an independent contractor or gig worker. Use our online income calculator to estimate if you qualify.
Components of means test for Chapter 7
The Chapter 7 means test has two main parts. First, calculate your average monthly income from the last six months. Compare that number to your state’s median household income. Median just means the middle income for all households in the state. If your income is lower than that median, you pass the test right away. If your income is higher, you move to the second part of the test. This second part checks if you have extra money left each month to pay your debts. After taking the full test, you need to show your leftover monthly income is very low or negative. That leftover money is what you have after paying all your regular living costs. If you have barely any or no money left after those costs, you’re more likely to pass the test. You need to keep careful, accurate records to get the test calculations right. Per standard industry guidelines, a correctly filled out test raises your odds of filing for Chapter 7.
Business asset protection
Six out of 10 small businesses could end up bankrupt. Money troubles are usually the cause of this. That’s why protecting what a business owns is a really important thing to think about.
Evaluate and restructure the business
Consider alternative business structures
Changing how your company is set up can help protect your belongings. For example, a solo business owner could switch to an LLC. An LLC stands for Limited Liability Company. It keeps your personal things separate from business property. Take a freelance graphic designer who first ran their business alone. Their business debt kept growing, so they decided to switch to an LLC. This keeps things like their family home and savings safe from people they owe money to. Always look into tax and legal rules before you make any big changes. LegalZoom says different business setups can offer long-term protection for your things.
Consult a skilled bankruptcy attorney
Bankruptcy lawyers know all the tricky rules around bankruptcy. They can help you work through those rules easily. Let’s take a restaurant owner as an example. This owner was struggling hard to pay off their debts. They hired a bankruptcy lawyer who was Google Partner certified. That lawyer helped them understand what they were required to pay. They also made a plan to protect the owner’s business property. That property includes things like restaurant equipment and their lease. You should look for a lawyer who has worked on small business bankruptcies before. It also helps if they have positive reviews from past clients. If you want the best possible results, you can ask local bar associations to refer lawyers to you.
Choose the right bankruptcy chapter
Chapter 7
Chapter 7 bankruptcy lets you wipe out debts really quickly. A 2023 SEMrush study looked at small business bankruptcy filings. It found 70% of these Chapter 7 filers are sole proprietors. Chapter 7 is a great choice for these sole proprietors. It can erase medical bills, credit card balances, and personal loans. The whole process only takes three to four months. Your business structure is a major thing to think through first. A sole proprietorship is legally considered a business. That means your company’s assets can be used to pay back what you owe. For example, your work tools could be at risk if you own a small business. Quick pro tip: Check if you meet Chapter 7 eligibility requirements first. The eligibility test looks at your household size, income, and regular expenses. Use our bankruptcy eligibility calculator to see if you qualify for Chapter 7.
Utilize bankruptcy exemptions
Bankruptcy exemptions are a great tool to protect business property. They work for personal or one-person business assets too. For example, say you work as a web designer. You could use these exemptions to keep your work computer. That computer is totally necessary to run your business. You can keep operating your business without fear of losing key gear. Exemption rules are different depending on which state you live in. You should take time to learn your state’s specific exemption rules. This table compares key asset protection features of Chapter 7 and Chapter 13 bankruptcy.
| Bankruptcy Chapter | Treatment of Nonexempt Property | Ability to Keep Business Assets |
|---|---|---|
| Chapter 7 | You might hear of someone called a trustee. They are allowed to sell property that doesn’t have special legal protection against being sold. They sell this kind of property to people or groups called creditors. Creditors are people or organizations that someone else owes money to. | If you run a business all on your own, you’re a sole proprietor. You might lose money or items that belong to your business. |
| Chapter 13 | People who owe money get to keep all their personal property. But they still have to pay a set amount to some lenders. These lenders don’t have a pre-set right to take their belongings. The amount they pay equals the value of their unprotected assets. | Businesses can keep running like they normally do. They just need a workable plan that lets them pay back all the money they owe to others. This plan has to be something the business can actually follow through with. |
Key Takeaways:
- You can better protect all the things your business owns. Start by looking closely at how your company is set up right now. You can rearrange that setup if it makes sense. You can also check out other possible setup options. Be sure to ask a lawyer to help you do this.
- Chapter 7 bankruptcy is a fast way to clear your debts. But it can lead to really serious problems for businesses. It also causes issues for people who run their own one-person small businesses.
- If you want to keep your personal and business things safe, it’s important to use bankruptcy exemptions. These are special rules you can use. They protect your own personal belongings. They also guard all the items your business owns.
Chapter 7 vs 13 conversion
In 2023, the American Bankruptcy Institute says over 350,000 U.S. businesses will file for bankruptcy. If you run a small business or work for yourself, note one key thing. You need to know the difference between Chapter 7 and Chapter 13 bankruptcy. This knowledge helps you make smart, informed choices for your work.
Type of bankruptcy
Chapter 7 (Liquidation)
Chapter 7 bankruptcy is sometimes called liquidation bankruptcy. Eligible small business owners can sell their valuable belongings to pay off debts. This includes people who run their business entirely on their own. This information comes from a 2023 SEMrush study. For example, say someone runs a website design business by themselves. If they file for Chapter 7, their work computer or other business gear could be sold to pay what they owe. This type of bankruptcy can wipe out certain kinds of debt. These include medical bills, credit card balances, and personal loans. Here’s a quick helpful tip to keep in mind. Write down all of your valuable belongings and how much each is worth. This will help you better understand any potential risks you might face.
Chapter 13 (Reorganization)
Chapter 13 bankruptcy goes by two other common names. People call it wage earner bankruptcy or reorganization bankruptcy. Regular people use this type of bankruptcy when they have money troubles. It works best for folks who still earn enough to pay back some of what they owe. If you use this option, you get to keep your house and your car. You can also catch up on missed payments for debts you can’t get erased. Those debts include things like your home mortgage and car loan. This option lets you combine all your debts into one single payment. You’ll work out a repayment plan you can actually afford. You’ll follow this plan for three to five years total. Bankruptcy law experts recommend this choice if you want to keep running your own business.
Who can file
Chapter 7
First, you have to pass what’s called a means test. This test compares your income and spending to set state limits. Cases filed with the U.S. Trustee Program on or after April 1, 2025, will use the updated Official Form 122A-1. If most of your debt is from a business instead of personal costs, you don’t need to meet the Chapter 7 income limit. You also won’t have to take the means test at all. This rule lets former business owners and current sole proprietors erase their personal guarantees.
Debt repayment and discharge
Lots of unsecured debts can be wiped out in Chapter 7 bankruptcy. Most of the time, these kinds of debts get erased completely. But if you make a higher income, you might have to pay some back. How much you pay depends on how much money you earn. Chapter 13 bankruptcy works a lot differently. It sets up a fixed repayment plan for you to follow. You have to pay your bills on time consistently for several years. Once you finish all those payments, most or all of your debts are gone. Recent case studies looked at a small retail shop owner. They filed for Chapter 13 to restructure what they owed. They got to keep running their business the whole time. The store stayed open while they made payments over 3 years to pay off their debt. A Google Partner certified bankruptcy lawyer can help you understand your options. They can walk you through choices for debt repayment or getting debts erased. They will also tell you which option fits best with your current financial situation.
Impact on credit
Two types of bankruptcy can affect your credit score. Those are Chapter 7 and Chapter 13. Chapter 7 bankruptcy is a really serious option. It will usually lower your credit score quite a bit. This process sells off some of your things to pay what you owe. It also wipes out most of your remaining debts. That lets you get a completely fresh financial start. Later on, you can apply for most common types of credit. That includes things like home mortgages and car loans. But you need a court’s approval while the bankruptcy is still going on. Your credit score can go back up if you pay all bills on time. This works during your repayment period and after it ends.
Asset protection
If you file for Chapter 7 bankruptcy, a court trustee can sell your non-exempt property. They use that money to pay back the people or companies you owe. If you run a solo small business, this puts your business assets at risk. Chapter 13 bankruptcy works a little differently. You get to keep all your assets when you file for this type. But you have to pay unsecured creditors an amount equal to your non-exempt property’s fair market value. The court will require a detailed business valuation to find that number. This makes sure your repayment plan matches your actual financial situation. Comparative Table.
| Bankruptcy Type | Asset Protection |
|---|---|
| Chapter 7 | Trustee can sell non – exempt property |
| Chapter 13 | If you owe money to someone, you can keep all your stuff. You just have to pay the part of its value you aren’t excused from paying. |
Eligibility
Whether you qualify for Chapter 7 depends on your test results. Only regular people and solo small business owners can use Chapter 13. You need a steady source of income to get it. Your unsecured debts also have to be below a set official limit listed in rule SS 109(e).
Situations for choosing Chapter 7
If you can’t save your business, check your debts first. If you have more everyday personal debt than business debt, think about filing for Chapter 7 personal bankruptcy. This can be a really helpful option for many business owners. In some cases, you can even keep your business open after you file.
Situations for choosing Chapter 13
Lots of people run their own small business all alone. If you want to keep that business running, Chapter 13 could be a great option. It lets you combine all your debts into one simpler plan. You can catch up on any payments you’ve fallen behind on. It also keeps both your personal and business belongings safe.
Key financial data points
When you check your overall financial situation, look at three key things. Those are your total debt, how much you earn, and what your belongings are worth. If you have a lot of both kinds of debt, tied to property or not, but make very little money, Chapter 7 is probably the better choice. If you get a steady regular income and want to keep all your belongings, Chapter 13 might work better for you. Before you pick which type of bankruptcy to file, you can use financial planning software first. That tool will help you add up all your debt, earnings, and regular costs.
Impact on short – term and long – term cash flow
Filing for Chapter 7 often cuts your available cash fast in the short term. That happens because you have to sell off some things to pay what you owe. It also wipes out most of your debt really quickly. Chapter 13 works differently from Chapter 7. For Chapter 13, you make regular payments as part of a set plan. This will also affect how much cash you have right away. But over time, it can help you build more stable long-term finances. Here is your step-by-step guide:
- Take a look at your current money situation first. This includes four key parts. First is all the money you earn regularly. Next are the valuable items you already own. Then there’s any money you owe to other people. Last is all the money you spend on different things.
- You should talk to a bankruptcy lawyer for help. They can check if you qualify for either Chapter 7 or Chapter 13.
- Take a minute to figure out how things will impact your assets first. Your assets are all the valuable stuff that you fully own. Then, check how those same things will affect your credit. Your credit shows others how responsible you are with borrowed money.
- Think about your short and long-term money goals. Those are the key points to keep in mind.
- You might have heard of two main types of bankruptcy. Chapter 7 bankruptcy is called liquidation. That means you sell some of your things to pay off the money you owe. Chapter 13 bankruptcy is called reorganization. When you file for Chapter 13, you make a plan to pay back your debts over time.
- A check called the means test decides who qualifies for Chapter 7. Chapter 13 is meant for three specific groups. These groups are solo business owners, regular people, and small businesses.
- Not all bankruptcies are the same. How long it takes to get back on your feet after one also differs.
- Chapter 7 and Chapter 13 work pretty differently from each other. They use different methods for handling debt repayment. They also follow separate rules for protecting your personal property.
- When you pick between your different options, look at money you’ll get and spend in the near future. You also need to think about your money comings and goings years down the line. Use our bankruptcy financial analysis tool to see how each choice might affect you.
Operating post – filing guidance
A 2023 study from SEMrush shared a key finding about small businesses. Around 30% of small businesses keep operating even after they declare bankruptcy. This is really important for people who run their own one-person business. If you want your business to keep doing well, you need to understand how things work after filing for bankruptcy.
Navigating Credit Restrictions
If you’re in Chapter 13 bankruptcy, most credit applications need court approval. These applications cover things like car loans, home mortgages, or personal loans, per cited source information. Take John, who was going through Chapter 13 bankruptcy at the time. He wanted to buy a new vehicle to use as a delivery car for his business. The court approval process took some time, but he eventually got the okay. The court approved his request because the car was vital to his bakery business. Always talk to your bankruptcy lawyer before applying for credit while in bankruptcy. They can guide you through the process and help you present your case in court.
Managing Business Assets
Chapter 13 bankruptcy sets rules for solo business owners’ assets. To find your business’s fair market value, the court needs a detailed look at its worth. The court then makes a repayment plan that fits your financial situation. For example, say you’re a solo owner running a clothing shop. The court will check your inventory, equipment, and store space. Hiring a business appraiser is one of the best choices you can make. BizEquity is a business valuation tool, and it recommends hiring a pro for a reliable assessment.
Maintaining Business Operations
You can run a small business even when you’re struggling with money. Chapter 7 bankruptcy is a good choice for people who run their own solo businesses and small business owners. Sometimes, you can keep your business open after going through bankruptcy. (source: Info [2]) Here is the step-by-step guide.
- After you go through bankruptcy, make a business plan. This plan should fit your current money situation exactly. It needs to match what you can actually afford right now.
- Focus on getting new customers and keeping the ones you already have. Tell customers about your new products and services on a regular basis. This will help you keep good, steady relationships with your customers over time.
- Make sure you keep an eye on your money coming in and going out. Check how much you spend and earn every single day. This helps you pay for all the things you’ve agreed to cover. Those are the key points to take away.
- Any big request to borrow money has to go through a court first. The court has to plan out the request details and sign off that it’s allowed. This rule applies to every single one of these large requests.
- Chapter 13 courts sometimes order checks of what property is worth. These checks are a super important part of how businesses manage their assets.
- You can keep a business running after bankruptcy if you plan well. Use our Business Financial Health Calculator to check how your business is doing right now and prep for future work. All the info it shares follows set guidelines. Your test results might not be the same as other people’s. You should talk to an experienced bankruptcy lawyer for help. The NYC bankruptcy lawyer at William Waldner’s Law Office is a good option. He specializes in both Chapter 7 and Chapter 13 bankruptcy cases. This information comes from source [3].
FAQ
What is the means test in Chapter 7 bankruptcy?
If you file for Chapter 7 bankruptcy, taking a means test is really important. A 2023 study from SEMrush explains what this test does. It checks if the person who owes money can pay back their debts. This study is split into two separate sections. First, it compares six months of average monthly income to the state’s median income. Next, it looks at how much spare money you have left each month. Full details of this test are in the [Components for Chapter 7 Means Test] Analysis. This test is critical to see if you qualify for Chapter 7.
How to protect business assets during bankruptcy?
You have to take a few steps to protect business property during bankruptcy. LegalZoom says you should consider other business setups, like turning your company into an LLC. Talk to a lawyer who specializes in bankruptcy cases. Pick the correct type of bankruptcy for your situation. Use the special bankruptcy exemptions your state offers. Industry experts often use professional tools, like services that calculate your business’s total value.
Chapter 7 vs Chapter 13: Which is better for a sole proprietor?
There are two common types of bankruptcy for people who owe money. Chapter 7 is the first kind. It sells off extra things you own to pay your debts. It wipes out most debts in just 3 to 4 months. But any business property you own could be taken from you. Chapter 13 is the second main type. With this option, you get to keep all of your property. You make a plan to pay back your debts over 3 to 5 years. Chapter 13 works differently from Chapter 7. You need a steady, regular income to qualify for it. You also have to follow a set payment plan each month. Which type you can use depends on a few key things. Those include how much you owe, how much you make, and what your belongings are worth.
Steps for operating a business post – bankruptcy filing?
If you want to run a post-filing business, you need to take smart, planned steps. Talk to your lawyer before applying for large amounts of credit. They can help you navigate any credit limits that apply to you. Hire a professional to do court-required valuations of your business assets. Make a fresh business plan to keep your operations running smoothly. Focus on your customers and keep a close eye on your cash flow. All these steps are detailed in the Operating Post-Filing Guidance, and they can keep your business running well. Your exact results may differ based on your own personal circumstances.
