Running a small business often means dealing with uncertainty; shifts in the market, cash-flow challenges, mounting debt, and changing customer demand. When debt becomes overwhelming, filing for bankruptcy may be a path to relief. For business owners in Minnesota, understanding the ins and outs of bankruptcy, especially Minnesota Chapter 7 Bankruptcy and Minnesota Chapter 13 Bankruptcy, can make a crucial difference. This guide from Behm Law Group explains what you need to know, whether you aim to close shop, reorganize, or preserve your business and assets.
What Is Small Business Bankruptcy?
Small business bankruptcy is not a one-size-fits-all solution. The right path depends on your business structure, debt load, and whether you want to continue operations.
The most common paths for small business owners are:
- Chapter 7 Bankruptcy (liquidation)
- Chapter 13 Bankruptcy (debt adjustment for qualifying individuals/sole proprietors)
- (In some cases) other forms like Chapter 11 — though often less common for small businesses.
Your choice depends on whether your business is structured as a sole proprietorship, corporation, LLC, or partnership — and whether you aim to close, restructure, or keep running.
Chapter 7 Bankruptcy: When Liquidation Makes the Most Sense:
Chapter 7 is often called “liquidation bankruptcy.” Under this route:
- The business ceases operations. A trustee sells off non-exempt assets and distributes proceeds to creditors.
- For corporations or LLCs, only business property is subject to liquidation — personal property of the owner is usually protected.
- If you previously personally guaranteed business loans or leases, you might remain personally liable — Chapter 7 may not wipe those out.
- For sole proprietors, filing under Chapter 7 may discharge unsecured debts — offering a fresh financial start.
When it works best:
- Your business has significant unsecured debt, minimal assets, and no realistic plan for recovery.
- You wish to close operations cleanly rather than try to salvage the business.
What you sacrifice:
- You give up your business and its assets.
- Some debts — especially secured ones — may remain, or require collateral surrender.
Chapter 13 Bankruptcy: Restructure Without Losing Everything
Chapter 13 offers a different approach. It’s designed for individuals (often sole proprietors) with regular income who want to reorganize debts rather than liquidate.
Under Chapter 13:
- You propose a court-approved repayment plan — typically over 3 to 5 years — to repay some or all of your debts.
- This can allow you to catch up on secured debt (e.g., business vehicles, equipment), back taxes, or personal debts tied to business obligations.
- You may be able to continue your business operations while reorganizing debt — rather than shutting down entirely.
This makes Chapter 13 a strong option when owners want to protect business assets and maintain operations while getting debt under control.
Key Differences: Chapter 7 vs. Chapter 13 Bankruptcy
Purpose
Chapter 7: Used to close a business and sell assets to pay debts.
Chapter 13: Used to reorganize debts and create a repayment plan.
Business Status
Chapter 7: The business usually shuts down.
Chapter 13: The business can stay open if it can still operate.
Who Can File
Chapter 7: Individuals, corporations, LLCs, and partnerships.
Chapter 13: Only individuals or sole proprietors with steady income.
How Debts Are Handled
Chapter 7: Most unsecured debts are wiped out; some secured debts may require giving up property.
Chapter 13: Debts are repaid over time through a court-approved plan.
Asset Protection
Chapter 7: You might keep some personal items, but most business assets are sold.
Chapter 13: Lets you keep business assets while making payments.
Best For
Chapter 7: Businesses that cannot recover or continue.
Chapter 13: Business owners who want to reorganize and keep operating.
When Should a Small Business Consider Bankruptcy?
Bankruptcy isn’t always the right solution, but in some situations, it may provide a structured way out. You might consider bankruptcy if you:
- Are unable to keep up with loan, credit card, or vendor payments
- Are facing vendor demands, collection notices, or lawsuits
- Have fallen behind on rent, taxes, or payroll
- Are using personal funds to cover business obligations
- Find debt increasing faster than revenue or sales
- Are personally guaranteeing business debts and at risk of personal liability
If these challenges persist, bankruptcy might be the most practical option — whether that means liquidation under Chapter 7 or reorganization with Chapter 13.
What Bankruptcy Can — and Cannot — Do?
✅ What It Can Do
- Halt creditor harassment, wage garnishments, and lawsuits once the filing is in place (automatic stay).
- Offer legal protection and a repayment or discharge plan for unsecured debts.
- Provide a path for sole proprietors to keep business assets while reorganizing debts under Chapter 13.
⚠️ What It Cannot Do
- Fix a fundamentally flawed or unsustainable business model — if the business lacks viable prospects, restructuring may only delay failure.
- Guarantee that secured debts will be eliminated — often they require surrendering collateral or restructuring payment.
- Always remove personal liability if you personally guaranteed business loans or leases (especially under Chapter 7).
Because of these limitations, working with experienced legal counsel is essential to choose the correct path and navigate the process.
Why Working with an Experienced Law Firm Matters?
Bankruptcy law is complex. Choosing the wrong chapter, or improperly handling documentation, can leave you worse off. Firms that specialize in small-business bankruptcy can:
- Help you evaluate whether Chapter 7 or Chapter 13 (or another chapter) fits your specific situation
- Assist in preparing required forms: assets, liabilities, income, expenses, contracts, leases, and more
- Guide you through creditor meetings, hearings, repayment plan proposals (in Chapter 13), and court procedures
- Help protect exempt assets and maximize the benefit of discharge or restructuring
At Behm Law Group, we understand the stakes for small business owners. We work closely with you to review your company’s financial structure, liabilities, and long-term prospects — only then do we recommend the best path forward.
How to Decide What’s Right for Your Business?
1. Assess your business’s viability. If the business has no realistic chance of recovery — with declining revenue, mounting debts, or unsustainable operations — Chapter 7 may be the cleanest solution.
2. Review personal vs. business liability. If you personally guaranteed loans, consider how bankruptcy affects your personal assets.
3. Consider your long-term plans. If you want to continue the business or maintain key assets, Chapter 13 might offer flexibility.
4. Evaluate income stability. Chapter 13 requires steady, sufficient income to support a repayment plan.
5. Consult experienced counsel. Bankruptcy laws vary by state; professionals can guide you through exemptions, state-specific rules, and best strategies.
Conclusion:
Bankruptcy, whether through Chapter 7 or Chapter 13, can be a lifeline for small business owners facing overwhelming debt. Choosing the right path depends on your business structure, debt load, personal guarantees, and long-term goals. While Chapter 7 offers a clean break, Chapter 13 may enable you to reorganize debt and retain business assets.
At Behm Law Group, our mission is to guide you through these difficult choices with transparency, care, and expertise. We help you understand the consequences, the process, and, most importantly, how to rebuild.
If you’d like to explore whether bankruptcy is the right solution for your situation, we’re here to help. Contact Behm Law Group at 507-387-7200 to schedule a consultation and discuss your business and financial goals, and determine the best path forward.
