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Business Bankruptcy Types: Chapter 7 vs 11 vs 13 Guide
Bankruptcy is not one tool. Compare Chapter 7, 11, 13 and Subchapter V by business structure, plus the 2026 debt limits, and see which fits your case.
Business Concepts
Business Bankruptcy Types: Chapter 7 vs 11 vs 13 Guide
Bankruptcy is not one thing. It is a menu of legal tools, and picking the wrong one can mean liquidating a business that could have survived, or burning months on a reorganization that never had a chance. The chapter you file under depends on two things: your legal structure and what you actually want to happen next.
Quick answer
Chapter 7 is liquidation: the business closes and assets are sold to pay creditors. Chapter 11, including the fast, cheap Subchapter V track, lets a business keep operating while it reorganizes debt. Chapter 13 is reorganization for individuals and sole proprietors only, using a 3 to 5 year repayment plan. Your business structure decides which doors are even open to you.
Key takeaways
- Chapter 7 ends the business; Chapter 11 keeps it alive; Chapter 13 is for people, not corporations.
- LLCs and corporations cannot use Chapter 13, and Chapter 7 does not erase their business debt, so they lean on Chapter 11 or Subchapter V.
- Subchapter V is the cheapest, fastest reorganization path for small businesses, which is why filings jumped 67% in Q1 2026.
- The 2026 Subchapter V debt limit is $3,424,000; pending bill S. 3977 would raise it to $7.5 million.
- Tax debts and personal guarantees usually survive bankruptcy, so talk to a lawyer before you file anything.
Disclaimer: This article is for general educational purposes only and is not legal advice. Bankruptcy law is complex and fact-specific, and rules change. Consult a licensed bankruptcy attorney before making any decision about your business.
The three core bankruptcy chapters, in plain English
Federal bankruptcy law gives businesses and their owners a handful of options, but three chapters do most of the work. Each one solves a different problem, and telling them apart is a core piece of the business literacy every founder needs.
Think of them as exit doors with very different signs. One says shut it down cleanly. One says keep going, but restructure. One says individuals only. Reading those signs correctly is the whole game.
Chapter 7: liquidation
Chapter 7 is the shutdown option. A court-appointed trustee sells the company's non-exempt assets and distributes the proceeds to creditors. The business stops operating.
Here is the trap that catches owners: for an LLC or corporation, Chapter 7 does not discharge the business debt. The entity dissolves, but the debt is not wiped clean the way it is for individuals. For a sole proprietorship, the picture differs because the owner and the business are legally the same person, so personal Chapter 7 can discharge qualifying business debt.
Chapter 11: reorganization
Chapter 11 is the survival option. The business keeps operating as a debtor in possession while it negotiates a plan to pay creditors over time, often at reduced amounts. Big companies use it; so do mid-sized ones that need breathing room.
The downside is cost and complexity. Traditional Chapter 11 involves creditor committees, court oversight, and legal bills that can crush a small business before the plan is even confirmed. That problem is exactly what Subchapter V was built to fix.
Chapter 13: reorganization for individuals
Chapter 13 is reorganization, but it is reserved for individuals, including sole proprietors who run an unincorporated business. The filer commits to a 3 to 5 year repayment plan based on disposable income.
An LLC or corporation cannot file Chapter 13. That single rule pushes most incorporated small businesses toward Subchapter V instead, a distinction that ties directly to how you fund and structure the assets a company runs on.
How business structure decides your options
Your legal structure is the first filter. It quietly eliminates choices before you even weigh strategy, which is why the way you incorporate matters long before any distress appears.
| Business type | Chapter 7 | Chapter 11 / Subchapter V | Chapter 13 |
|---|---|---|---|
| Sole proprietor | Yes (personal) | Possible, rare | Yes (personal) |
| LLC | Yes (entity closes, no discharge) | Yes | No |
| Corporation | Yes (entity closes, no discharge) | Yes | No |
Sole proprietors usually file personal Chapter 7 or Chapter 13, because their business and personal finances are one legal pool. The business debt rides along with everything else they owe.
LLCs and corporations take a different road. They reorganize through Chapter 11 or Subchapter V, or they close the entity and the owner files personally to deal with any personal guarantees attached to business loans. Those guarantees are the reason a clean corporate shutdown often still drags the owner into personal bankruptcy.
The chapter does not choose itself. Your entity type and your personal guarantees do, long before strategy enters the room.
Subchapter V: why small businesses are flooding this lane
Subchapter V is a streamlined version of Chapter 11, created by the Small Business Reorganization Act of 2019 and effective since February 2020. It strips out the most expensive parts of traditional reorganization.
There is no creditor committee and no quarterly U.S. trustee fees. Attorney costs run far lower, one Northern District of California sample put Subchapter V professional fees around $146,000, roughly $500,000 below comparable Chapter 11 cases. The owner stays in control and confirms a plan faster.
The outcomes back up the appeal. Department of Justice data shows Subchapter V cases confirm a plan about 52% of the time versus 23% for traditional small-business Chapter 11, and they typically wrap in about 6.6 months instead of 10.4. Dropping the absolute priority rule and the creditor vote is why so many plans actually cross the finish line.
The numbers also tell a macro story. Subchapter V elections jumped 67% in the first quarter of 2026, with 833 filings versus 499 a year earlier, according to Epiq AACER data. April brought 301 small-business filings, up 46% year over year, and May added another 281, up 36%.
Michael Hunter, Vice President of Epiq AACER, tied the surge to elevated interest rates, persistent inflation, high operating costs, and auto-loan delinquencies near 15-year highs, plus a 26% jump in foreclosure filings in Q1 2026. When affordable credit dries up, more businesses reach for restructuring tools.
The 2026 eligibility limit you cannot ignore
Subchapter V has a hard ceiling. As of June 2026, total debt must stay at or below $3,424,000, and at least 50% of it must come from business activity. Cross that line and you are back in standard Chapter 11.
This limit is in flux. On March 3, 2026, six bipartisan senators introduced S. 3977, the Bankruptcy Threshold Adjustment Act of 2026, which would set the Subchapter V limit at $7,500,000 and the Chapter 13 limit at $2,750,000.
As of June 2026, S. 3977 had been placed on the Senate Legislative Calendar but was not yet law. The American Bankruptcy Institute estimates that roughly 1,475 potential filers fell out of eligibility while the lower limit was in force, so verify the current status on Congress.gov before you assume a number.
What bankruptcy does not erase
Bankruptcy is powerful, but it is not a magic wand. Several obligations usually survive a filing, and misunderstanding this wrecks plans.
Most tax debts are generally not dischargeable. Personal guarantees on business loans often follow the owner even after the entity dissolves. Fraud-related debts and certain other categories also tend to stick around.
That is why specialized legal advice matters more here than in almost any other business decision. A filing that looks clean on paper can leave the owner personally exposed for years, which is one more reason to track early warning signs on your balance sheet and get counsel before things harden.
Alternatives worth weighing before you file
Filing is not always the first move. Several out-of-court paths can resolve distress faster and cheaper, and they avoid the public record a bankruptcy creates.
- Workout: direct negotiation with creditors to extend terms or reduce balances.
- Debt consolidation or refinancing: replacing scattered high-cost debt with a single, more manageable obligation.
- Assignment for the benefit of creditors (ABC): a state-law liquidation alternative that can be quieter than Chapter 7.
- Orderly wind-down: closing on your own terms, paying what you can, and limiting collateral damage.
The rising filing numbers across 2026 are also a signal for the other side of the table. Lenders, suppliers, and vendors should treat the trend as a prompt for tighter screening of customers, because a customer's distress quickly becomes a creditor's problem.
This guide is general information, not legal advice, and does not create an attorney-client relationship. Bankruptcy rules and debt limits change frequently. Speak with a qualified bankruptcy attorney about your specific situation before filing.
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Frequently asked questions
What is the difference between Chapter 7, Chapter 11, and Chapter 13 bankruptcy?
Chapter 7 is liquidation: the business closes and assets are sold, though sole proprietorships can discharge debt while LLCs and corporations cannot eliminate business debt. Chapter 11 is reorganization, letting the business keep operating. Chapter 13 is reorganization only for individuals and sole proprietors, using a 3 to 5 year repayment plan.
Which bankruptcy chapter should my business use?
It depends on your legal structure and goal. Sole proprietors typically use personal Chapter 7 or Chapter 13. LLCs and corporations use Chapter 11 or Subchapter V, or they close the entity while the owner files personally to address personal guarantees on business loans.
What is Subchapter V and why is it so popular?
Subchapter V was created by the Small Business Reorganization Act of 2019 and took effect in February 2020. It is the fast, low-cost reorganization path for small businesses, with no creditor committee and lower trustee and attorney costs. That efficiency is why filings keep climbing.
What is the Subchapter V debt limit in 2026?
The 2026 Subchapter V debt limit is $3,424,000, and at least 50% of the debt must come from business activity. Pending legislation, S. 3977, could permanently restore the limit to $7.5 million, so check the current status on Congress.gov before filing.