From turning a dream into a business plan to tackling the details of day-to-day logistics, small business owners often put an enormous amount of time and effort into making their company a success. Unfortunately, even great ideas do not always pan out. According to the U.S. Small Business Administration, only about half of all new businesses manage to survive longer than five years. 

For sole proprietors who have put up private assets to see their vision become a reality, the prospect of failure can be devastating—financially and emotionally. Feelings of shame and overwhelming stress may lead individuals to put off dealing with the problem, even as debts continue to mount. It is important for small business owners facing crushing payment commitments to know that filing for bankruptcy may be the most favorable way to protect personal assets and possibly even keep their company running. 

Chapter 7 bankruptcy 

In most cases, filing for Chapter 7 bankruptcy will mean that the business will have to close. However, this type of bankruptcy allows a sole proprietor to eliminate both personal and business debts without having to make payments over time. While both business and personal assets become part of the bankruptcy estate and may be subject to liquidation, certain assets deemed necessary for living may be exempt, including a home or personal vehicle. 

Chapter 13 bankruptcy 

Sole proprietors who do not qualify for Chapter 7 or who would like to keep their business open may file for Chapter 13 bankruptcy, which allows the owner to keep all assets while reorganizing debt. In this type of filing, the individual may be able to make smaller monthly payments for both personal and business debts over three or five years. 

It is important to keep in mind that, while filing for bankruptcy may eliminate most unsecured debt (debt not secured by collateral), it will not eliminate every type of debt. Examples of financial obligations that bankruptcy cannot discharge include child support and alimony payments, income tax debt and student loan debt.