Should I Close My Business or File Bankruptcy in 2026?

If you own a business, a personal Chapter 7 bankruptcy can put the company at risk of a temporary shutdown or of being lost entirely. But if you file Chapter 7, will the business be closed down? Not necessarily. It can be that the business closes just temporarily while the case is pending, or permanently, or that it does not close at all. How your Chapter 7 affects your business depends on two things. First, whether your business carries liability insurance. And second is whether the trustee decides to sell the business or any business property.

Liability Insurance

The trustee holds all your property in trust while the case is pending. Since the business is property, the trustee holds it in trust, too. A business lawsuit is the last thing any trustee wants, so my guess is that the trustee is going to ask you for proof of your liability insurance. If the business isn’t covered by liability insurance, the trustee might decide that there is too much risk, and that it is better to close the business than to continue operating it without insurance. If you have liability insurance, the trustee has less of a reason to close the business.

What the Trustee Can Sell

Next, can the trustee sell the business, or even just the equipment or other business property? If the trustee is concerned that valuable assets will grow legs and walk out the door, the trustee will close the business and inventory the assets. If there is no equipment or property that can be sold, you are a lot less likely to need to close the business. Just because you have a business doesn’t mean the trustee will sell it. Just because you own a business doesn’t mean you will have to close it down.

To find out what the trustee can sell, you have to apply the Chapter 7 property rules to all your assets, business and personal. You keep what an exemption protects, and you lose the rest, and the trustee sells it for the creditors. There are very few exemptions for businesses: check wildcard and tools of the trade. Some states let you choose from state or federal exemptions. Federal exemptions are often larger than state exemptions. Which list you should use depends on which gives you more protection in each case. And if you will lose the business or significant assets in a chapter 7 bankruptcy, you may want to consider filing a chapter 13, where the trustee does not sell assets. The business itself cannot file a 13, you can file a 13 as an individual.

What you actually own is very important. For example, if you are a sole proprietor, then you own all the business assets. If your business is an LLC or Corp, you own the shares or an interest in the LLC/Corp, and that is what you are exempting.

Whether You Would Lose It in Chapter 7

You’ll likely keep your business in Chapter 7 in a few situations. The first is when you are the sole proprietor of a service business (law office, accounting firm, freelance writer) and do not sell goods. Without products, there isn’t likely to be inventory that a trustee can sell, and the trustee can’t sell your labor. You’ll still have to exempt tools, equipment, furnishings, receivables, though.

The second is when you personally own all of a corporation or LLC which no one would buy from you. You exempt the value of your interest in the company, not the company’s assets, and no exemption is written for that. So while the business may not be worth anything or close to nothing because nobody would want to buy it — for example, if it depends on your labor and you’re not part of the package — the trustee will likely abandon it, and you can keep it.

The same applies to owning only part of an LLC or corporation that no one would buy. Selling part of a company can be even harder, especially if the other owners were your relatives. Many investors stay away from these companies.

On the other side, if you are a sole proprietor of a product business, you likely will lose it, because you need products to operate and you own the business property personally. That’s especially true if selling the property will close the business for good.

If you own a business through an LLC or corporation and the company is one a buyer would want, your shares or interest in the company will have value. You’ll need to exempt them. And there’s no exemption for that. You could use the wildcard exemption to protect the company, but the trustee can sell the company and you will only get the exemption amount from the sale. For example: You have a wildcard exemption of $5,000 that you use on the company’s stock. The company is sold for $50,000, you receive the $5,000, the creditors get the remaining $45,000, less the cost of sale, less the trustee’s commission. That’s a risk when a Chapter 7 trustee can sell the company for more than your exemption. And if you own a partial interest in a business operated by an LLC or corporation and the company is sellable, you’ll need to exempt your partial interest. The same risk applies.

Being a partner in a partnership is its own problem. Before you file, make sure you understand the liability implications for the other partners and what will happen to the partnership. In some cases, that means winding it down, in others not. It’s a complicated issue. Most often partnership agreements provide for the dissolution of the partnership if a partner files for bankruptcy. See a business bankruptcy attorney.

So, if you are the boss at your business and are considering Chapter 7 bankruptcy, does that mean you will have to close the doors? The business might be closed down. Or it might not. Insurance comes first. Beyond that, it depends on how valuable the business or business property is and whether you would lose it in Chapter 7.