Running a small business is one of the most rewarding things you can do — but it also comes with financial risk. When debt starts piling up and there's no clear way out, many small business owners in Mankato wonder whether bankruptcy is even an option for them. The short answer is yes, but the process looks different depending on how your business is structured and what you're hoping to achieve. Behm Law Group has helped countless Southern Minnesota residents navigate this exact situation, and understanding your options is the first step toward financial relief.
Who Can File Chapter 7 — Business Owners Included?
Sole Proprietors vs. Incorporated Businesses
The type of legal structure your business operates under plays a major role in how Chapter 7 bankruptcy works for you. Sole proprietors — those who haven't formed a separate legal entity like an LLC or corporation — are considered the same legal person as their business. This means a sole proprietor can file Chapter 7 personally and include both personal and business debts in the same filing. For many small business owners in Mankato, MN, this is actually an advantage because it allows them to wipe out business-related debt alongside personal obligations in one consolidated process.
If your business is structured as an LLC or corporation, the business is treated as a separate legal entity. The business itself can file Chapter 7, but that filing results in a full liquidation — meaning the business closes, assets are sold off, and the proceeds go to creditors. Owners of LLCs and corporations do not receive a personal discharge through a business filing, so if personal guarantees are involved, a separate personal bankruptcy may also be necessary.
Passing the Means Test as a Small Business Owner
Why the Means Test Matters?
To qualify for Chapter 7 bankruptcy in Minnesota, filers must pass the means test, which compares your income against the state median income. For small business owners, calculating income can be more complex than it is for salaried employees. Business income, draws, and distributions all factor into the equation, and irregular income streams can make the calculation tricky to navigate without experienced legal guidance.
If your income exceeds the state median, you may still qualify under the second part of the means test, which looks at allowable expenses and disposable income. Many small business owners have significant deductible expenses — equipment, lease payments, insurance, payroll — that can reduce their disposable income enough to pass the threshold. This is where working with a knowledgeable bankruptcy attorney in Mankato becomes especially important.
What Happens to Business Assets in a Chapter 7 Filing?
Exemptions, Liquidation, and What You Keep
One of the biggest concerns for small business owners considering Chapter 7 is what happens to business property. In a personal Chapter 7 filing by a sole proprietor, business assets are subject to the bankruptcy trustee's review. However, Minnesota provides a set of exemptions that protect certain property from liquidation. Understanding which of your business tools, equipment, or vehicles qualify for exemption can mean the difference between restarting fresh and losing critical assets.
Here's a quick overview of how asset treatment differs by business structure:
| Business Type | Files Personally? | Business Debts Included? | Business Continues? |
|---|---|---|---|
| Sole Proprietor | Yes | Yes | Possibly |
| LLC / Corporation | No (business files separately) | Business debts only | No — liquidated |
| LLC Owner (personal filing) | Yes | Personal guarantees only | Depends |
If you're a sole proprietor who wants to keep operating after bankruptcy, Chapter 7 may still be viable — provided your ongoing income can sustain the business and your essential tools are protected under exemptions. If continuing the business isn't the goal, Chapter 7 offers a clean, relatively fast exit from overwhelming debt.
Chapter 7 vs. Chapter 13 for Small Business Owners
Choosing the Right Path
Not every small business owner is best served by Chapter 7. Chapter 13, sometimes called a reorganization bankruptcy, allows individuals to restructure debt into a manageable repayment plan over three to five years while keeping assets intact. For business owners who want to preserve their company and have a steady income to support a repayment plan, Chapter 13 may be a better fit.
Here's a side-by-side comparison to help clarify the key differences:
| Feature | Chapter 7 | Chapter 13 |
|---|---|---|
| Timeline | 3–6 months | 3–5 years |
| Business Continuity | Possible for sole proprietors | More likely |
| Debt Discharge | Most unsecured debt eliminated | Partial repayment then discharge |
| Asset Risk | Higher (liquidation possible) | Lower (assets protected in plan) |
| Income Requirement | Must pass means test | Must have regular income |
At Behm Law Group, both Chapter 7 and Chapter 13 filings are handled exclusively — meaning you get focused, experienced guidance rather than a generalist's overview.
Common Reasons Small Business Owners in Mankato File Chapter 7
Many small business owners reach the point of considering bankruptcy for similar reasons. Some of the most common include:
- Accumulated credit card debt used to fund business operations
- Personally guaranteed business loans that the business can no longer service
- Declining revenue following economic downturns or industry shifts
- Medical debt layered on top of existing business obligations
- Failed business ventures leaving behind supplier and vendor debts
- Tax debt combined with payroll obligations that have become unmanageable
If any of these sound familiar, Chapter 7 bankruptcy in Mankato, MN may offer the fresh start you need to move forward without the weight of unresolvable debt.
Serving Small Business Owners Across Southern Minnesota
Behm Law Group serves clients throughout the region, including Mankato, Marshall, Worthington, Owatonna, New Ulm, St. Peter, Redwood Falls, Waseca, Fairmont, North Mankato, Le Sueur, New Prague, Sleepy Eye, Mapleton, Winnebago, Nicollet, Madison Lake, Springfield, Wells, Waterville, New Richland, Montgomery, and beyond. Wherever you're located in Southern Minnesota, help is within reach.
Frequently Asked Questions
Q1. Can I keep my business open after filing Chapter 7?
It depends on your business structure and the nature of your assets. Sole proprietors may be able to continue operating if the business generates income and essential tools are protected by exemptions. An attorney can assess your specific situation and advise on the best path forward.
Q2. Will Chapter 7 discharge my business credit card debt?
Yes. Business credit card debt that you are personally liable for — including cards taken out in your name for business use — is typically dischargeable under Chapter 7.
Q3. What happens to my employees if I file Chapter 7?
If the business is liquidated as part of a Chapter 7 filing, employees would be let go. However, if you're a sole proprietor filing personally and intend to continue operations, employment may not be affected depending on circumstances.
Q4. Do I need to close my business bank account when I file?
Not necessarily, but the bankruptcy trustee will review all accounts as part of the process. Your attorney will walk you through any steps needed to protect business and personal funds appropriately.
Q5. How long does Chapter 7 stay on my credit report?
A Chapter 7 bankruptcy remains on your credit report for up to 10 years. However, many filers find their financial footing — and creditworthiness — well before that window closes.
Q6. How do I know if Chapter 7 or Chapter 13 is right for my situation?
The best way to determine which chapter applies to your circumstances is to consult directly with an experienced bankruptcy attorney. Behm Law Group offers thorough case reviews and will explain every option available to you based on your income, debts, assets, and goals.
Contact Behm Law Group Today
If you're a small business owner in Southern Minnesota feeling crushed by debt, you don't have to figure this out alone. Behm Law Group is the only law firm in south central and southwestern Minnesota that practices exclusively in bankruptcy — which means every case gets the focused attention it deserves. Reach out today to schedule a consultation and take the first step toward financial relief.
📞 (507) 387-7200 ✉️ stephen@mankatobankruptcy.com
