When many people consider filing for bankruptcy, personal or consumer bankruptcy comes to mind. However, business or non-consumer bankruptcy is available for individuals and businesses who seek help with business debt.

Business debt is different from consumer debt because it’s incurred from profit-seeking business endeavors as opposed to consumer purchases for things such as food, clothing, and shelter. A business bankruptcy tends to be more complicated than one filed by an individual consumer—in part because of the significant differences that exist between the two types.

Here are a few things to know before moving forward on your company’s behalf:

• a business doesn’t have to meet income qualifications
• individuals with primarily business debt don't need to pass the Chapter 7 means test
• business debt is rarely wiped out (discharged) in a Chapter 7 bankruptcy, and
• the personal assets of the business owners can be at risk (but it depends on the business entity type).

Failing to understand these nuances could easily result in an unexpected—and costly—outcome. If you’re contemplating moving forward with a business bankruptcy, it’s prudent to consult with an attorney. In fact, in some cases, hiring an attorney is a requirement.

It’s likely that you already know the type of bankruptcy you should file because, in most cases, it’s relatively straightforward—individuals seeking bankruptcy protection usually file personal or “consumer” bankruptcy, and businesses file a “non-consumer” or business bankruptcy.

But then again, it isn’t always that clear.

For instance, if you’re a self-employed party planner with a large credit card balance that you incurred after buying school clothes, streamers, and paper cups, you might not know which you’ll qualify to file. The same might be true for a work-at-home travel blogger who racked up debt after vacationing in a new destination spot.

• So how are you to know? Ultimately, your particular debt will determine the filing type. Here’s the rule: If your debts are “primarily consumer debts,” you’ll file a personal If you have more business debt than consumer debt, you’ll file a business bankruptcy.
• What is a consumer debt? It’s debt incurred when purchasing items that you use for personal, family, or household purposes. Such items will include things that you need to live, like groceries, clothing, and rent, as well as things that you buy for pleasure, such as a gym membership or a trip to Jamaica.
• What does “primarily” consumer debt mean? The answer depends on where you live. Some courts allow you to add up your consumer debt. If the consumer debt amount exceeds that of your business debt, you’ll file a consumer bankruptcy—and vice versa. Other courts ask that you add up the number of debts that you have instead of the total dollar value of each type. You’ll have to use the standard used by your local court.

Filing for bankruptcy can have lasting (and costly) consequences. If you’re not sure which type is best for you, speak with an attorney. A local bankruptcy lawyer will review all aspects of your financial situation and provide valuable insight into how the courts handle cases in your area.

If it’s inevitable that the business will close, the business will likely file a liquidation bankruptcy. By contrast, if a business can continue operating after restructuring its debt payment, the company would probably benefit from a reorganization bankruptcy.

• Business liquidation. It’s important to unwind a failing business with no hope of recovery in a transparent manner. Why? Because it reduces the chance that a creditor will accuse the owner of pillaging company assets before shutting it down—allegations that can translate into costly litigation. In a Chapter 7 bankruptcy, the bankruptcy trustee—the court-appointed official responsible for overseeing the case—sells the company’s assets and distributes the sales proceeds to the creditors in an orderly fashion. Another valuable benefit? Filing for Chapter 7 bankruptcy takes the burden of closing the business off of the owner.
• Business reorganization. Many business owners hope that filing for bankruptcy will help the company remain open, and in time, thrive. A Chapter 11 bankruptcy can help an existing business do that very thing (and in some cases, an individual who owns a business as a sole proprietor can file for Chapter 13 bankruptcy). Also known as “reorganization,” this bankruptcy type allows a company to renegotiate its debt contracts with creditors and come up with a manageable repayment

Putting a business in bankruptcy is complicated and isn’t always the best option. Find out more about the process in Small Business Bankruptcy Relief.

A struggling business might be able to benefit from one of four types of bankruptcy, depending on the entity type and the goal for the company. Businesses that are closing or already closed will likely file for Chapter 7 bankruptcy. A business that would like to remain open can file for Chapter 11 bankruptcy.

Although the business itself can’t file for Chapter 13, the individual business owner might be able to do so—and it might lower monthly debt obligations enough to get the company back on track. Here are brief descriptions of each chapter and the business entities that can utilize that particular type.

• Chapter 7 bankruptcy. In this frequently filed chapter, the bankruptcy trustee—the court-appointed official tasked with administering the case—liquidates (sells) assets and distributes the proceeds to creditors. Any business can file for Chapter 7 bankruptcy, but only a sole proprietor can have qualifying debt wiped out (discharged). Also, it’s important to note that if the business is a sole proprietorship or a partnership, the personal assets of the sole proprietor or partners can be used to pay off business debt.
• Chapter 13 bankruptcy. In the right circumstances, a qualified business will be able to lower its monthly debt obligation and remain operational after an individual owner files for Chapter 13 bankruptcy (the business itself can't file unless the owner is a sole proprietorship). Also, debt limits exist. If the total debt exceeds the amount allowed, the business (and owner) must file for Chapter 11 bankruptcy, instead.
• Chapter 11 bankruptcy. Many companies that want to remain open opt for Chapter 11 bankruptcy. Once filed, the company will disclose its income, assets, and debt, and draft a reorganization plan that preserves critical business assets while reducing or eliminating certain debt so that the business can pay creditors out of the monthly profit. All business entities can file for Chapter 11 bankruptcy, and there are no debt limits. Even so, this chapter is used most effectively by larger, established companies. It’s often too costly for a small business with a limited income stream to gain the necessary approval from creditors and the court.
• Chapter 12 bankruptcy. This type is similar to a Chapter 13 bankruptcy, but it’s only available to family farmers and fishermen. It allows a small farming or fishing enterprise to stay in business while affording relief through debt restructuring.

Filing for bankruptcy can have costly and irreversible consequences. Before filing, it’s important to consult with a knowledgeable bankruptcy attorney about the particular needs of your business.

Your debt matters when deciding which type of bankruptcy to file. If your debt is "primarily” consumer debt, you’ll choose a personal or individual (consumer) bankruptcy. If you have more business debt, however, you’ll file a business (non-consumer) bankruptcy.

You’ll categorize your debt by looking at its purpose. Specifically, business debt results from a desire to derive a profit. You take out business debt to help you make money in a business venture, not for personal, family, or household purposes. Debt incurred for personal purposes is “consumer” debt.

Here are examples of business debt:

• a business loan
• the cost to lease office space
• personal and business taxes, and
• the balance owed on a delivery van used in a cookie business.

Figuring out your particular debt type can get tricky. For instance, if you take out a home equity loan and use the funds to open a 24-hour diner, the purpose of the debt would be to make a profit operating a restaurant. In that case, the debt would be a business debt even though you secured the loan with your residence.

Similarly, suppose that you raise hamsters and sell them to a local pet store for profit. To track your expenses, you use a credit card to pay for the supplies. But you also use the same credit card to purchase your morning coffee. As a result, you’ll have consumer and business debt on the same account.

Keep in mind that addressing all types of business debt is beyond the scope of this article, and identifying one from the other isn’t always obvious. For instance, in some cases, student loans and income tax debt count as business debt (courts handle this differently). Before filing for bankruptcy, it’s best to meet with a knowledgeable bankruptcy attorney—especially since the initial consultation is often free.

It depends. If you, as an individual, have already filed a personal bankruptcy and received a discharge for business debt (at least some of your obligations were wiped out), you might have to allow a certain period to elapse before you’ll be entitled to another discharge. How much time must pass (if any) will depend on the bankruptcy chapter you filed before, as well as the chapter you intend to file again.

A business cannot receive a discharge in Chapter 7 (other than a sole proprietor) and can’t file a Chapter 13 case. A business can, however, receive a debt discharge in Chapter 11.

When Seeking a Chapter 7 or 13 Discharge

Only an individual or sole proprietor is entitled to a discharge in Chapter 7 or Chapter 13 bankruptcy. If you’ve received a discharge in one of these capacities, and you’d like to receive another, here’s how long you’ll have to wait:

• Chapter 7 bankruptcy after a Chapter 7 or 11 discharge. The filer must wait eight years.
• Chapter 7 bankruptcy after a Chapter 12 or 13 discharge. The filer must wait six years (unless the filer paid 100% of unsecured claims or 70% of unsecured claims in a good faith plan).
• Chapter 13 bankruptcy after a Chapter 7, 11, or 12 discharge. The filer must wait four years.
• Chapter 13 bankruptcy after a Chapter 13 discharge. The filer must wait two years.

When Seeking a Chapter 11 or 12 Discharge

The rules for filing and receiving a discharge under Chapter 11 or 12 are much easier to meet. First, an individual, sole proprietor, partnership, limited liability company, or corporation can receive a discharge in Chapter 11 or 12 bankruptcy, regardless of any previous discharge received. In other words, there’s no waiting time between discharges.

Exceptions exist, however. Specifically, you’ll want to be sure to tell your attorney if you (or the business entity) violated a court order, or had another case dismissed during the 180 days before your bankruptcy filing. In that case, you might not qualify for another discharge.

No. The rule is as follows: An individual or a sole proprietor filing a business (or non-consumer) bankruptcy can get qualifying debts wiped out (discharged) in a Chapter 7 bankruptcy once every eight years.

If the individual or sole proprietor wants to file a Chapter 7 bankruptcy more than once within the eight-year period, it can do so. But debts won’t be wiped out. It’s the discharge that’s limited—the ability to get debts wiped out—not the filing itself.

Here’s how it works.

If a second Chapter 7 bankruptcy gets filed before eight years elapses, the bankruptcy trustee—the individual tasked with administering the case—will sell any nonexempt property (property that the filer isn’t entitled to keep) and distribute the funds to creditors. The filer won’t receive another discharge, however. Because the desire to obtain a discharge prompts most Chapter 7 filings, filing more than once within an eight-year period is rare, although it can happen.

It’s important to understand that partnerships, limited liability companies, and corporations aren’t entitled to receive a discharge under Chapter 7 bankruptcy. These entity types use this chapter to liquidate (sell) and disperse assets to creditors in a transparent manner.

Successive Chapter 7 filings aren’t usually an issue for these entities because the initial Chapter 7 bankruptcy filing effectively dismantles the business. A defunct company doesn’t need additional bankruptcy relief.

A sole proprietor can always file a bankruptcy on behalf of the business. It works a bit differently with partnerships and corporations. A corporate resolution allowing for the bankruptcy filing must be included in a corporate bankruptcy. All general partners must agree to file for bankruptcy for the bankruptcy to be considered voluntary. You'll find more information in 341 Meeting of Creditors for Businesses.

^Back to top

Yes. If the business has valuable assets—such as cash, investments, equipment, or real estate—and a creditor is concerned about getting paid, it can force the business into either a Chapter 7 or Chapter 11 bankruptcy (involuntary relief isn’t available under Chapter 12 or Chapter 13 bankruptcy).

Forcing a business into an involuntary bankruptcy can benefit a creditor in several ways. It causes the automatic stay—the order that puts a stop to collection activities—to go into effect. The stay evens the playing field because one creditor cannot gobble up all of the business assets to the detriment of the others.

Also, a bankruptcy trustee—the court-appointed individual that oversees the case, including the 341 meeting of creditors—can step in and manage the business and unwind transfers of money or assets that the company might have made in an attempt to avoid paying creditors (fraudulent or preferential transfers).

However, involuntary bankruptcies rarely get filed because creditors must meet certain criteria—and it isn’t easy to do so. For instance, if the business has less than 12 creditors, a single creditor can file the petition as long as that creditor’s claim meets the current claim amount requirements. The debt must be undisputed (the business acknowledges that it owes it) and unsecured (not guaranteed by property called “collateral,” such as a commercial building or a company vehicle).

Although this test might sound simple to satisfy, it isn’t, and here’s why: If the business has more than 12 claims (bills), three creditors must join in and sign the involuntary petition—and all debts, no matter how small, must get counted. Most creditors don’t want to work together because once in bankruptcy, the creditor must share the assets with others and will likely receive a portion of the amount owed. It can be more lucrative to work towards collecting a debt in full without competition from other creditors.

An involuntary case can be expensive, too. If the business contests the case (disagrees with the creditors’ right to file it), the case will move into litigation and proceed to trial—and litigation is expensive. Before filing, a creditor would assess the likelihood of coming out ahead after paying for attorneys, experts, and other costs of suit.

Other risks exist, too. For instance, if the court finds that the creditors shouldn’t have filed the matter (improperly filed the case in bad faith), the creditors would be required to pay the attorneys’ fees of the business.

It depends. As an individual, you cannot own the corporation itself because it exists as a separate legal entity. Instead, you hold your ownership interest in the form of shares, which is a type of property.

When you file for personal bankruptcy, you must disclose all of your property—including your corporate stock. Additionally, you’ll tell the court how much the stock is currently worth by assigning each share a value.

What will happen next will depend on the following:

• the type of bankruptcy you file
• the value of your shares, and
• whether your state’s exemption laws will allow you to exempt (keep) them.

Specifically, each state allows its residents to keep a certain amount of property. If the property isn’t needed to maintain a household and employment, it’s unlikely that your state will have a specific exemption that covers it—and corporate shares aren’t assets that most states believe are necessary for everyday life.

However, you might have a wildcard exemption that allows you to keep a certain amount of any property of your choosing. In that case, you can use your wildcard exemption to protect your interest in the company (although typically, wildcard exemptions aren’t for large dollar amounts).

If you can exempt the shares, then the answer to this question is simple—nothing happens to your corporation. Your ownership interest and corporate participation will not change.

If you can’t exempt the shares, then the analysis becomes more complicated.

Filing for Chapter 7 bankruptcy. The bankruptcy trustee will be able to sell nonexempt shares and distribute the proceeds to the corporate creditors. If that happens, the corporation will likely continue to exist. However, you’d lose all ownership interest in the company.

Keep in mind that just because the trustee has the right to sell your shares doesn’t mean that someone will want to buy them. The outcome depends primarily on how necessary you are to the profitability of the company.

For instance, it’s likely that the shares will sell if the company will remain operational (and profitable) without you. The situation will be entirely different if you own all or a majority of the shares and it isn’t practical for someone else to manage the business in your absence.

Let’s say that you’re the only plumber in a plumbing enterprise and you aren’t willing to stay on as an employee. It would be unlikely that the trustee could find a buyer because, without you, the corporation would be worthless. The trustee would likely abandon the property (the shares), and you’d retain your ownership interest.

Filing for Chapter 13 bankruptcy. You’ll be able to hold on to the shares even if they’re nonexempt. But there’s a catch. You must pay your creditors the value of the nonexempt stock through your three- to five-year repayment plan.

Filing for Chapter 11 bankruptcy. Sometimes a filer's debts exceed the amount allowed by Chapter 13. In that case, you can reorganize your debt by filing an individual Chapter 11 bankruptcy.