Small business owners in Louisville file bankruptcy more often than people realize. Sole proprietors, 1099 contractors, LLC owners with personal guarantees, and small partnerships all face debt situations where Chapter 7 or Chapter 13 can fix the problem. This is not Chapter 11. Chapter 11 and its small-business version, Subchapter V, are built for companies reorganizing larger debts, and most small business Chapter 11 filings fail or convert to liquidation. For small business owners whose debt is really personal liability, Chapter 7 and Chapter 13 work faster, cost less, and end the debt.
On this page:
- Why This Office Does Not File Chapter 11
- Chapter 7 for Small Business Owners
- Critical Warning: Trust Taxes Are Never Dischargeable
- Chapter 13 for Small Business Owners
- Five Louisville Small Business Scenarios
- Income Tax Discharge for Business Owners
- Frequently Asked Questions
Small Business Reorganization Act (SBRA) Chapter 11 Bankruptcy
Why This Office Does Not File Chapter 11
Nick Thompson focuses on consumer bankruptcy and tax-related bankruptcy. He does not file Chapter 11 cases. Most small business debt that walks into his office is structured as personal liability anyway. The business may be an LLC or a sole proprietorship, but the owner signed personally on credit cards, lines of credit, vendor accounts, and SBA loans. Chapter 11 is rarely the right tool for small business owners. Chapter 11 cases are expensive and involve extensive reporting.
Most small business Chapter 11 filings fail or convert to Chapter 7. Filing fees and trustee oversight costs alone often exceed the value of the relief. Subchapter V, the streamlined small-business version of Chapter 11, was designed to help and currently covers debts up to about $3,024,725 in aggregate, noncontingent, liquidated secured and unsecured debt. It requires extensive accounting and legal work this office does not handle. For most Louisville-area small business owners, Chapter 7 or Chapter 13 ends the debt faster and at a lower cost.
Chapter 7 for Small Business Owners
Chapter 7 works for many small business owners. If the business has closed or is closing, and the owner’s debts are mostly personal guarantees on business obligations, Chapter 7 can discharge those personal guarantees. A Chapter 13 often allows you to restructure similar to a Chapter 11. Vendor accounts, business credit cards in the owner’s name, lines of credit, and equipment loans the owner signed personally can all be discharged. Old income tax debt that is more than 3 years old and meets the discharge rules can also be discharged.
Critical Warning: Trust Taxes Are Never Dischargeable
| Trust taxes cannot be wiped out in bankruptcy.
Chapter 7 does not discharge trust taxes. Sales tax collected from customers but not remitted, and withholding tax taken from employee paychecks but not remitted, are never dischargeable in Chapter 7 or Chapter 13. This is set by 11 U.S.C. § 507(a)(8)(C). Worse, the Kentucky Department of Revenue and the IRS can pursue a responsible person personally, and willful non-remittance can lead to criminal prosecution. Nick handled tax matters as a former state tax department attorney and knows how aggressive trust tax enforcement gets. |
Chapter 13 for Small Business Owners
If the business is still operating and the owner wants to keep it going, Chapter 13 bankruptcy for business owners is often the better tool. A Chapter 13 plan can repay priority tax debt, such as recent income taxes and trust taxes, over 3 to 5 years. The plan can catch up business mortgage arrears, equipment loans, and other secured debts. The automatic stay stops lender collection during the case. Owner-paid debts and personal guarantees are reorganized along with the personal side.
Not sure whether Chapter 7 or Chapter 13 fits your business? Call 502-625-0905 for a free review.
Five Louisville Small Business Scenarios
These are illustrative case types, not specific clients. They show the range of debt structures this office handles for small business owners:
| A 1099 contractor
Lost a major client and ran up $40,000 in personal credit card debt covering business expenses. Chapter 7 discharged the credit cards. |
| Restaurant owner
$80,000 in vendor debt, $60,000 on an SBA loan with a personal guarantee, and $25,000 in past-due rent. Chapter 13 reorganized the debts and saved the building lease. |
| Service business owner
A truck on a personal loan, $30,000 in business credit cards, and $15,000 in recent income tax debt. Chapter 13 caught up the truck loan, discharged the credit cards over the plan, and repaid the tax debt as a priority claim. |
| Real estate agent
$50,000 in broker-related debt and a 1099 income drop. Chapter 7 cleared the debt. |
| LLC owner
A $200,000 commercial mortgage in arrears. Chapter 13 caught up the mortgage over 5 years while keeping the building. |
Income Tax Discharge for Business Owners
Income tax more than 3 years old can sometimes be discharged in Chapter 7. The return must have been filed on time, and the tax must have been assessed more than 240 days before filing. Trust taxes are the exception and never qualify.
Nick Thompson holds U.S. Tax Court License #51, which is unusual among Louisville bankruptcy attorneys and helps with cases involving older income tax debt. For the full breakdown, see discharging old income tax debt or Kentucky tax resolution and relief.
Frequently Asked Questions
Q: I have an LLC. Can I file personal bankruptcy?
Yes. Most small business owners signed personal guarantees on business debts. Personal bankruptcy discharges those personal liabilities. The LLC itself is a separate legal entity and may or may not need its own bankruptcy, depending on its assets and debts.
Q: Will bankruptcy close my business?
Not necessarily. Chapter 13 is designed to let business owners keep operating while reorganizing debt. Chapter 7 usually applies when the business has closed or is closing. The free consultation walks through which path fits.
Q: I owe sales tax to Kentucky. Can bankruptcy help?
Sales tax is a trust tax and cannot be discharged in either Chapter 7 or Chapter 13. But Chapter 13 can repay the sales tax over 3 to 5 years through the plan, which stops the Kentucky Department of Revenue from levying your accounts during the case. Old income tax over 3 years can sometimes be discharged.
Q: Do you file Chapter 11 for small businesses?
No. This office focuses on Chapter 7 and Chapter 13. For most small business owners with personal guarantees, those two chapters end the debt faster and cheaper than Chapter 11 or Subchapter V. If your case truly requires Chapter 11, this office will refer you to an appropriate attorney.
Q: Do you serve small businesses outside Jefferson County?
Yes we practice statewide. The office handles small business bankruptcy for clients in Jefferson, Oldham, Bullitt, Spencer, Nelson, and Meade counties. All cases are filed at Gene Snyder Courthouse in Louisville.
Free Small Business Bankruptcy Consultation
Small business bankruptcy decisions move fast. Nick Thompson personally meets with every potential small business client at the Stone Creek Parkway office. The consultation walks through Chapter 7, Chapter 13, and the personal-guarantee math in detail. Call 502-625-0905 or schedule a free consultation online. For the federal overview of how Chapter 7 works, see the federal Chapter 7 overview.
Resources for Bankruptcy
Louisville Kentucky Bankruptcy Forms
Credit Counseling to Meet Bankruptcy Requirements
Chapter 11 Business Bankruptcy Information
Short Sale Checklist in Louisville Kentucky
List of Debtor Duties in Chapter 13 for Louisville Kentucky
Tax and Bankruptcy Lawyer for Business Trust and Income Tax
If you are thinking about filing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.