When debts outrun what the store can pay, "just close" and "file bankruptcy" are different roads with different consequences — especially for whatever you personally guaranteed. This guide goes deeper than the usual summary so you can have an informed first conversation with a bankruptcy attorney.
First, the two insolvency tests
Before any filing, distinguish two questions the Insolvency Test tool asks:
- Balance-sheet insolvency: liabilities exceed the fair value of assets. This is the test for a Chapter 7 liquidation.
- Equitable / cash-flow insolvency: you cannot pay debts as they come due. This is the practical "can’t continue" test and often the real trigger to close.
Chapter 7 — liquidation
| Attribute | Detail |
|---|---|
| Who | Any business entity or individual |
| Outcome | Business closes; trustee sells assets; debts discharged (entity) |
| Timeline | ~3–6 months |
| Cost | ~$2K–$5K attorney + $338 filing fee |
| Automatic stay | Yes — 11 U.S.C. § 362 halts collections |
Chapter 11 — reorganization (and Subchapter V)
| Attribute | Detail |
|---|---|
| Who | Any entity; can keep operating |
| Cost | ~$25K–$100K+ attorney + $1,738 filing fee |
| Subchapter V | Debt ≤ $3,024,725 (or $3,424,000 from 2025-04-01); ≥50% from business; no creditor committee; plan due in 90 days; ~$10K–$25K |
| Plan | Repay creditors over time; cram-down possible |
Chapter 13 — individuals & sole props
Only individuals (including sole proprietors) may use Chapter 13. It proposes a 3–5 year repayment plan while you keep the business. Debt limits: secured ≤ $1,580,125 and unsecured ≤ $526,700 (current through March 31, 2028). A corporation or LLC cannot file Chapter 13 — only Ch 7 or Ch 11.
The personal-guarantee trap
Where an ABC fits
An Assignment for the Benefit of Creditors is a state-law liquidation (a Ch 7 alternative) that can preserve more going-concern value than a fire sale and avoid federal bankruptcy, but it still pays professionals off the top and does not discharge a personal guarantee.
Decision framework
| If… | Then… |
|---|---|
| You can pay debts as they come due | Orderly close; negotiate lease buyout; clean final returns |
| Insolvent but want to keep operating | See a Ch 11 / Sub V attorney |
| Insolvent, shutting down, PG at risk | Compare Ch 7 (entity) + personal exposure; consult attorney |
| Sole prop, want to keep business | Chapter 13 may fit (debt limits apply) |
Sources: U.S. Courts bankruptcy basics, 11 U.S.C. § 362 (automatic stay), Chapter 11/Subchapter V thresholds (2025-04-01 adjustment), Chapter 13 debt limits (through 2028-03-31), ABI and practitioner summaries on guarantees. Retrieved 2026-08-13. This is educational only — not legal advice. Consult a licensed bankruptcy attorney.