Tips About Chapter 7 Bankruptcy for Owners of a Small Business

Tips About Chapter 7 Bankruptcy for Owners of a Small Business

June 15, 2019

If you’re struggling with your finances as a small business owner, filing for Chapter 7 business bankruptcy in Montgomery County, TX could be one way to save your company, or simply offer you a less turbulent way of closing it down. It’s not common for a business entity itself to go through Chapter 7 bankruptcy unless it’s a sole proprietorship, because the business won’t get a debt discharge, and filing for bankruptcy could increase other liabilities you have. But if you signed personal contracts agreeing to pay for certain business debts, you may be able to eliminate your liability for those debts by filing a Chapter 7 bankruptcy claim in your name.

Of course, this only works if you actually have liability for those business debts. Whether or not you’re responsible for the debts of your company depends primarily on the type of business structure you have.

Sole proprietorship

In a sole proprietorship, the owner and the business are treated as the same entity, so you are fully liable for your business debts and thus able to eliminate qualifying debts by filing for Chapter 7 bankruptcy. You would need to pass the Chapter 7 means test to be eligible, but this won’t be a problem if you have more business than personal debt.

If you have a product-based business rather than a service-based business, it will likely be difficult for you to retain your business after filing for bankruptcy, as most of the products you sell would not be exempt.


A partnership is a separate legal entity and is allowed to file Chapter 7 bankruptcy. Under a partnership there is no discharge of business debts, and the partners are not allowed to use exemptions to protect property. The trustee in the case closes and liquidates the business to be able to pay off creditors.

Each partner is personally liable for business debts, and if there aren’t enough business assets to pay off creditors, the trustee or creditors could seek to go after personal assets of each partner. This makes it a better idea for each partner to file a personal Chapter 7 bankruptcy claim.


Corporations are also able to file Chapter 7 bankruptcy, but cannot receive a discharge. The biggest reason to do so as a corporation is because it provides a much simpler means of liquidating the business, as the burden of paying off creditors and selling assets goes to the trustee rather than the owners. However, there are more risks that are likely to outweigh this benefit. Stockholders who personally guaranteed corporate debts will be potentially responsible for the debt unless that shareholder files bankruptcy in his or her own name. Corporations are also likely to see better financial results by trying to negotiate their debts with creditors. Finally, filing for bankruptcy allows creditors to argue officers did not follow proper corporate actions.

Limited liability company (LLC)

Bankruptcy works essentially the same with an LLC as with a corporation, with all the same risks applying.

For more information about the best steps to follow when filing for business bankruptcy in Montgomery County, TX, contact James R. Jones, Attorney at Law to speak with an experienced Chapter 7 bankruptcy lawyer today.

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