How Does Business Bankruptcy Work?

There are three main types of bankruptcies and they have different effects on businesses and their owners. Whether you’re looking at Chapter 7, 11, or 13, you’ll want to consult a professional bankruptcy attorney to learn more about which option is best for you.

As the pandemic continues to provide economic uncertainty, businesses across the country have had to rethink, innovate or consider closing up shop altogether. If your business falls into the latter category, you might be thinking about bankruptcy as a way to resolve outstanding debts and clear your slate. Before doing so, it’s worth understanding the basics of the three main types of bankruptcy: Chapter 7, 11, and 13 and how they can affect you, your employees, and your future.

How Does Chapter 7 Bankruptcy Work?

If business debts are mounting, your operation cannot sustain regular income, and you foresee closing down entirely as the best option, Chapter 7 could be a viable option. If you are a sole proprietor, you may be subject to a “means test,” which will determine if you meet the income requirements to qualify for Chapter 7. If your business is a corporation, a limited liability company, or if you are a sole proprietor whose debts are not predominantly consumer debts, you will not be subject to the means test. A Chapter 7 bankruptcy proceeding is often referred to as a liquidation because a court-appointed trustee takes possession of the business’ assets and sells them in order to pay as many creditors as possible (liquidating the assets). After all the assets are sold and creditors paid, sole proprietors would receive a discharge from any remaining debts. Partnerships, corporations, and other entities are not eligible for discharge.

How Does Chapter 11 Bankruptcy Work?

If you’re interested in keeping the business up and running, you could opt for Chapter 11, which works toward reorganization. This is typically an option for partnerships, corporations, limited liability companies, and sole proprietors with debt levels too high to qualify for Chapter 13. The business has to file a detailed reorganization plan (how it will deal with creditors) and the proceeding allows you to terminate contracts, renegotiate loans, and take other actions to get back to profitability. This process can take more than a year to complete and may require your creditors’ approval via a general vote.

How Does Chapter 13 Bankruptcy Work?

This option is best suited for individuals who want to reorganize a business rather than liquidate it. It starts with filing a repayment plan with the court detailing how you’ll repay your debts (a bankruptcy attorney or law firm can help you draft this). Oftentimes, this option works better for sole proprietors whose personal and business assets are mixed with personal assets as Chapter 13 allows you to keep things like your house whereas Chapter 7 may make that more difficult. Your total repayment amount will vary widely based on how much you make and how much you owe.


A qualified bankruptcy attorney can help you sort through each bankruptcy option and make the right decision for you and your business. Natural State Law is here to help. Call us today at (501) 916-2878 to learn more about how we’ve helped Arkansas residents clear their slates and start over.