Summary
At Kasen Law Group, we regularly work with Delaware businesses and business owners who are trying to figure out the right way to shut down a struggling company. If your business owes more than it can pay, or you are already facing a lawsuit or an SBA collection action after closing, Chapter 7 bankruptcy can stop that litigation immediately through the automatic stay and put a neutral trustee in charge of winding things down fairly. Whether you are personally exposed depends on your entity structure, any guarantees you signed, and how the business was run leading up to closure.
This article walks through the questions we hear most often from clients in exactly this position, including one we think does not get enough attention: the order in which you close the business and file for bankruptcy.
Do You Actually Need Bankruptcy?
Not every business closing needs a bankruptcy filing. If debts are minimal or creditors are cooperative, a simple wind down can be enough.
In our experience, Chapter 7 becomes the right call when:
- Liabilities exceed what the business owns
- There are multiple creditors who need to be treated fairly and consistently
- A lawsuit or judgment is already in motion
- You want a court appointed trustee, rather than yourself, handling asset sales and creditor payments
- You need the protection of the automatic stay right away
Unlike an individual filer, a business does not receive a discharge. Chapter 7 for a company is a liquidation: the trustee sells what remains, distributes proceeds according to the priorities set out in the Bankruptcy Code, and the business winds down through the court rather than informally.
Why We Usually Recommend Filing Before You Close the Entity
A common instinct is to close the business first and sort out creditors afterward. We generally advise against that sequence when real debt is involved, for several reasons.
- The automatic stay only exists once a bankruptcy case is filed. Close first, and you have no shield while creditors continue to sue or collect.
- A trustee follows a legally required payment order. That protects you from later accusations that you distributed assets unfairly while handling the wind down yourself.
- If disputes surface after the entity is already closed, you may have no court supervised process left to resolve them, and could be pulled into defending claims personally.
- A bankruptcy filing creates a documented, court supervised record that debts were handled properly. That record is valuable protection if anyone later questions how the wind down was managed.
- Once the bankruptcy case wraps up, the practical work of closing the business is essentially done. Filing the final state paperwork afterward becomes a formality rather than the main event.
We tell clients: bankruptcy first gives you structure and protection. Closing first and hoping for the best leaves you exposed.
Already Closed and Facing a Lawsuit, Including From the SBA?
We see this often. A business stops operating, and months later the owner is served with a lawsuit, or the SBA or U.S. Treasury begins pursuing an unpaid loan. Closing a business does not erase its debts.
- SBA loans, including EIDL loans, are generally dischargeable like other unsecured business debt
- A personal guarantee on an SBA loan survives the business closing, meaning you can still be pursued individually
- Once a loan is referred to Treasury, the government can pursue wage garnishment or offset without necessarily obtaining a court judgment first
- Filing bankruptcy, for the business or for yourself if you are personally exposed, triggers the automatic stay and generally halts these collection efforts while the case proceeds
If you have already been served, do not wait. Missing a deadline can lead to a default judgment that is far harder to undo than responding on time.
Could You Be Personally Liable?
- Entity protection. LLCs and corporations generally shield owners from business debt, unless that protection is undermined.
- Personal guarantees. If you signed one for a loan, lease, or line of credit, that obligation follows you individually regardless of the entity’s fate.
- Piercing the veil. Commingled funds, undercapitalization, ignored formalities, or fraud can expose owners personally. This is fact specific and worth a real conversation with counsel.
- Payroll tax exposure. Responsible individuals can be personally liable for unpaid trust fund payroll taxes regardless of entity type.
- Wind down conduct. Paying yourself while creditors go unpaid, or operating while insolvent, can create liability that would not otherwise exist.
What Happens to Employees, Leases, and Accounts
- Employees may be laid off in connection with a filing, though final wage and WARN Act notice requirements can still apply.
- Commercial leases become part of the estate, and the trustee, not the owner, decides whether to keep or reject them.
- Business bank accounts become estate property once a case is filed.
- Secured creditors are typically paid from their collateral first, followed by priority claims like certain wages and taxes, with general unsecured creditors sharing what is left.
Common Questions We Get
Can I file Chapter 7 if the business already stopped operating?
Yes, and often you should, particularly if creditors are actively collecting or suing.
Can the SBA still sue after the business is closed?
Yes. Closing an entity does not erase the debt, and the SBA or Treasury can still pursue it.
Should I close the business or file bankruptcy first?
In most cases involving meaningful debt, we recommend filing first. It gives you the automatic stay, a neutral trustee, and a documented process, rather than leaving you to manage creditor disputes on your own after the entity is already gone.
Work With Kasen Law Group
We represent Delaware businesses and business owners before the U.S. Bankruptcy Court for the District of Delaware, as well as clients in New Jersey, the Eastern District of Pennsylvania, and the Southern District of Florida. If you are weighing whether to close your business, have been served with a lawsuit, or are dealing with the SBA or Treasury over a defaulted loan, reach out before a deadline passes.