Ultimately, every business will close. All businesses fail eventually.
In March 2025, the oldest business in North America filed bankruptcy. Hudson’s Bay Company, incorporated May 2, 1670, filed under the Canadian equivalent of Chapter 11. They quickly determined that it would not be able to put forth a viable restructuring plan and entered into liquidation. In June 2025, after 355 years, all its retail stores closed.
General Motors was one of the largest industrial companies in the world. For 77 years, from 1931 through 2007, it was the largest automaker. It filed bankruptcy on June 1, 2009. Shareholders had no consideration for their stock, which now has no value.
Your clients are eventually going to have their businesses fail. Fortunately, new businesses are being opened all the time. The U.S. has over 32.5 million small businesses.
Since the pandemic in 2020, business formations have skyrocketed. A high propensity business is one that is likely to be an employer, with at least one employee.
When Businesses Fail
Small businesses fail fast: 20% fail during their first year, with another 10% failing in the second year. By year five, half of all businesses created today will be gone. Only 30% to 35% survive for 10 years, according to the Commerce Institute.
Why do they fail? Insufficient sales is the number one cause, followed by cash flow problems.
Cash flow problems are understandable when we look at the sources of financing for many small businesses, with 35% using credit cards for financing, compared to 23% using bank loans; and 18% of economic injury disaster loans from the SBA, while 14% get financing from family and friends, according to the National Small Business Association’s 2025 Economic Report.
When these businesses fail, lawyers lose clients. Additionally, many small business owners do not know what options they might have to stay in business. Just 34% of small business owners understand the distinction between Chapter 7 and Chapter 11 bankruptcies. Even fewer – only 9% – know that the Small Business Organization Act simplifies the bankruptcy filing process.
The Lawyer's Role
Lawyers play an important role in supporting small businesses. We draft and review contracts with customers, vendors, suppliers, and employees. We negotiate and prepare leases, non-compete, and non-disclosure agreements. We advise clients on regulatory compliance, employment issues, and environmental matters, and assist with financing and investment negotiations.
We also handle intellectual property, such as trademarks, copyrights, patents, and trade secrets. We represent clients in disputes and litigation. We provide guidance on taxes, estate planning, and other issues that affect long-term success.
We have a vested interest in helping our clients stay in business and thrive.
Consider These Options for Small Businesses Facing Bankruptcy
Lawyers representing business clients should at least have a basic understanding of options that might be available to their clients when financial struggles arise.
Big business has Chapter 11, and that can work well as it did for General Motors. In that case, the shareholders lost their stock, but the business continued without a hiccup. General Motors is not operated by its shareholders, but by boards of directors and management teams.
That will not work for small businesses. Chapter 11 is costly, in both dollars and time. And the success rate is low.
In large measure, this is due to what is known as the Absolute Priority Rule. The Absolute Priority Rule creates a pecking order for creditors to be paid when there is not enough to go around. In Chapter 11, the debtor proposes a plan, and the creditors vote on that plan. Unless the creditors agree to the plan, the owners cannot keep their company unless all the creditors are paid in full. Payment in full is usually out of the question, as the inability to pay is what drove the bankruptcy filing in the first place.
While large businesses like General Motors do not need the shareholders to operate the business day-to-day, small businesses do. The creditors are not going to come out and drive the truck, make the doughnuts, or milk the cows.
Fortunately, there are small business alternatives. Many businesses do not have to close. I have seen hundreds of businesses that might well have been able to remain in business if they had only known the options available to them.
Here is a summary of those options:
Chapter 7: This is a liquidation, but it can work if the debtor has an agreement with its secured creditors. The debtor can discharge unsecured debt, keeping only the secured creditors. For some this can create a positive cash flow situation.
However, only an individual can receive a discharge of debt, so this approach requires a sole proprietorship.[1]
Chapter 13: This form of reorganization is only available to individuals, and thus also requires a sole proprietorship.[2]
It also has debt limits, which are currently set at $526,700 of unsecured debt and $1,580,125 secured debt.[3]
This approach works well if the debtor can pay the secured debts over the life of the plan, which has a maximum of five years. The debtor must also pay any tax debts over that same five years.
Chapter 12: This form of reorganization is only available for family farmers.[4] It also has a debt limit, currently set at $12,562,250.[5]
And There is Subchapter V
This is a form of reorganization created under the Small Business Reorganization Act, which took effect in February 2020. It has become widely popular, with more and more businesses seeking this form of relief. Here are some statistics as of December 31, 2024.
Subchapter V cases have approximately double the confirmed plan percentage, as compared to a traditional Chapter 11, and about 20% fewer Subchapter V cases are dismissed, as compared to a traditional Chapter 11. The cases proceed much more quickly to confirmation, and cost much less.
Interestingly, about 68% of the confirmed plans have been consensual, meaning the creditors have approved the debtor’s proposal. This signifies a successful resolution of disputes, and likely lower costs. It may be due, at least in part, to the fact that the trustee in a Subchapter V case is to “facilitate the development of a consensual plan of reorganization”.[6] No other form of bankruptcy directs the trustee to engage in such activity.
Subchapter V is available to individuals, entities, considerations, or LLCs.[7]
It does have a debt limit, currently at $3,424,000.
It is only available to debtors engaged in commercial or business activities, and at least 50% of the debt must arise from the business. Moreover, the business cannot be a single asset real estate operation.
Subchapter V eliminates much of the red tape and expense of a traditional Chapter 11 case. There is no creditors committee,[8] which is always costly, and there is no disclosure statement, which is often costly.[9]
The debtor still proposes a plan, and the creditors vote on that plan.[10] But the plan can be confirmed, provided several requirements are met:[11]
- The debtor must pay into the plan the value of the assets it is retaining.
- Secured creditors must receive at least the value of their collateral which the debtor is retaining.[12]
- Creditors must receive as much as they would in a Chapter 7 case.[13]
- Priority taxes must be paid in full through the plan, which will last three to five years.
- The debtor must pay into the plan any disposable income for the three-to-five-year length of the plan.[14]
- The court must find that the debtor will be able to make all payments under the plan, or if not, that there is a reasonable likelihood that the debtor will be able to make such payments and the plan contains appropriate remedies in the event of default.[15]
Conclusion
Business clients rarely know the options they have when they encounter financial struggles. As their trusted advisors, we should at least have some idea of those options. Many of our clients will see no hope, so we need to show them.
This article was originally published on the State Bar of Wisconsin’s
Solo/Small Firm & General Practice Blog of the Solo/Small Firm & General Practice Section. Visit the State Bar
sections or the
Solo/Small Firm & General Practice Section web pages to learn more about the benefits of section membership.
Endnotes
[1] 11 U.S.C. 727(a)(1). ↩
[2] 11 U.S.C. 109(e). ↩
[3] 11 U.S.C. 109(e). ↩
[4] 11 U.S.C. 109(f). ↩
[5] 11 U.S.C. 101 (18). ↩
[6] 11 U.S.C. 1183(c)(7). ↩
[7] See § 101(51D). ↩
[8] See § 1181(b). ↩
[9] See § 1187(c) (stating that 1125(f) – providing that the disclosure statement is either not necessary, may be submitted on standard forms, or may be conditionally approved subject to final notice and a hearing – will apply). ↩
[10] See § 1129. ↩
[11] See § 1191(b). ↩
[12] See Id. ↩
[13] See § 1191(c)(3)(B). ↩
[14] See § 1191(c)(2)(A). ↩
[15] See § 1191(c)(3)(A) (for both). ↩
