Sarah owns a small bakery in Royal Oak that’s been struggling since the pandemic. Her business owes $80,000 to suppliers, while she personally owes $45,000 in credit card debt she used to keep the bakery afloat. When creditors start calling daily, Sarah faces a crucial question: Should she file for business bankruptcy, personal bankruptcy, or both?
If you’re facing similar financial challenges, you’re not alone. Many Michigan residents and business owners find themselves caught between personal and business debts, unsure which path forward offers the best solution. The choice between business and personal bankruptcy isn’t just about paperwork—it’s about protecting your assets, your future, and your ability to rebuild.
This comprehensive guide will help you make an informed decision about which type of bankruptcy best serves your situation under Michigan law.
What Is Personal Bankruptcy?
Personal bankruptcy provides individuals with legal protection from creditors and a path to financial recovery. In most respects, filing for bankruptcy in Michigan isn’t different from filing in another state. The bankruptcy process falls under federal law, not Michigan state law, and works by unwinding the contracts between you and your creditors.
Personal bankruptcy comes in two primary forms:
Chapter 7 Bankruptcy (Liquidation) In Chapter 7 bankruptcy, some of your property may be sold to pay down your debt. In return, most or all of your unsecured debts (that is, debts for which collateral has not been pledged) will be erased. You get to keep any property that is classified as exempt under the state or federal laws available to you (such as your clothes, car, and household furnishings).
Chapter 7 typically takes 3-6 months to complete and offers a fresh start by eliminating most unsecured debts like credit cards, medical bills, and personal loans.
Chapter 13 Bankruptcy (Reorganization) Chapter 13 allows you to keep your property while paying back creditors through a court-approved repayment plan spanning 3-5 years. If you have more than $419,275 in unsecured debt you cannot file for bankruptcy under Chapter 13. You are also not allowed to file for Chapter 13 if you have more than $1.26 million in secured debts.
Who Qualifies for Personal Bankruptcy in Michigan?
Personal bankruptcy is available to individuals who meet specific criteria. For Chapter 7, you must pass the means test, which examines your income relative to Michigan’s median income levels. If you are found to have little to no disposable income, you are eligible to file under Chapter 7.
What Is Business Bankruptcy?
Business bankruptcy provides legal protection for companies facing financial distress. Unlike personal bankruptcy, business bankruptcy focuses on either liquidating the company’s assets or reorganizing its operations to continue functioning.
Chapter 7 Business Bankruptcy (Liquidation) Under personal bankruptcy, individuals filing successfully for Chapter 7 will have qualified debts discharged, while the business will be dissolved at the outcome of chapter. Because the business no longer exists after filing under Chapter 7, most opt to file for Chapter 11 bankruptcy.
In business Chapter 7, a trustee sells the company’s assets to pay creditors, and the business ceases to exist. This option works best for businesses with no viable path to profitability.
Chapter 11 Business Bankruptcy (Reorganization) This allows a business to reorganize and restructure its debt obligations similar to a Chapter 13 personal bankruptcy. A business owner who files for bankruptcy is able to prioritize and reduce their business-related debts, allowing time to restructure operations.
Chapter 11 is more complex and expensive than Chapter 7, but it allows businesses to continue operating while working out payment arrangements with creditors.
Who Qualifies for Business Bankruptcy?
Any business entity—including corporations, partnerships, and LLCs—can file for business bankruptcy. However, Stockbrokers, and commodity brokers cannot file a Chapter 13 bankruptcy petition.
Key Differences Between Business and Personal Bankruptcy
The distinctions between business and personal bankruptcy go far beyond who files them. Here are the fundamental differences:
Legal Entity Protection
Personal bankruptcy affects you as an individual, while business bankruptcy affects the legal entity. If you own a corporation or LLC, business bankruptcy may protect your personal assets from business creditors. However, if you personally guaranteed business debts, you may still face personal liability.
Asset Protection Variations
Michigan offers different exemptions for personal versus business assets. Bankruptcy filers in Michigan can choose between two sets of exemptions: federal bankruptcy exemptions and state exemptions so long as they’ve lived in Michigan for at least two years.
Personal exemptions under Michigan Compiled Laws Section 600.6023 protect essential items like your homestead, personal vehicle, and household goods. Business assets typically receive less protection, though some business equipment and inventory may qualify for exemptions.
Goals and Outcomes
Personal bankruptcy aims to give individuals a fresh financial start by eliminating debt or creating manageable payment plans. Business bankruptcy focuses on either winding down operations efficiently (Chapter 7) or reorganizing to maintain operations (Chapter 11).
Timeline and Complexity
Personal Chapter 7 cases usually conclude within 3-6 months, while personal Chapter 13 cases span 3-5 years. Business Chapter 7 cases can take 6-12 months, while Chapter 11 reorganizations may last several years.
Cost Considerations
A Chapter 7 bankruptcy in Michigan costs $338, while a Chapter 13 filing costs $313. Business bankruptcy filing fees are significantly higher, with Chapter 11 cases requiring a $1,738 filing fee plus additional administrative costs.
Which Type of Bankruptcy Should You Choose?
The choice between business and personal bankruptcy depends on several factors:
Sole Proprietorship Considerations
If you operate as a sole proprietor, there’s no legal distinction between you and your business. Your business debts are personal debts, so you would file personal bankruptcy. This includes freelancers, independent contractors, and unincorporated business owners.
Incorporated Business Owners
If you own a corporation or LLC, you have more options. You do NOT have to file the same type of business bankruptcy as your personal bankruptcy. You may opt for Chapter 7 on your personal bankruptcy, but then file Chapter 11 to keep the business running, paying your debts through revenue.
Mixed Personal and Business Debt
When you have both personal and business debts, consider:
- Whether you personally guaranteed business debts
- The total amount of each type of debt
- Your ability to maintain business operations
- The value of business assets versus personal assets
Factors to Evaluate
- Debt composition: Separate personal debts from business debts
- Asset protection: Determine which assets you most need to protect
- Future earning capacity: Consider your ability to generate income post-bankruptcy
- Business viability: Assess whether your business can recover with restructuring
Michigan-Specific Considerations
Michigan bankruptcy law includes several unique features that affect your decision:
Exemption Choices
You can choose whether you use the state exemption list or the list of federal bankruptcy exemptions, but you cannot mix both systems. If not allowed, with very few exceptions, you must use Michigan bankruptcy exemptions if you have resided in Michigan for at least 730 days before filing a Chapter 13 bankruptcy in Michigan.
Michigan’s state exemptions under MCL 600.6023 include:
- Homestead exemption up to $40,000 (or $60,000 for individuals over 65 or disabled)
- Motor vehicle exemption up to $3,775
- Household goods and clothing exemptions
- Tools of the trade up to $2,525
Court Jurisdictions
Michigan has two federal bankruptcy districts: the Eastern District (covering Detroit, Flint, and Bay City) and the Western District (covering Grand Rapids and Kalamazoo). Royal Oak falls under the Eastern District of Michigan.
State-Specific Procedures
While bankruptcy is federal law, Michigan has specific procedures for:
- Means testing calculations
- Exemption applications
- Local court rules and practices
- Trustee appointments and procedures
The Filing Process: What to Expect
Documentation Requirements
Both business and personal bankruptcy require extensive documentation:
Personal Bankruptcy Documents:
- Six months of pay stubs
- Tax returns for the past two years
- Bank statements
- Asset valuations
- List of creditors and debts
- Credit counseling certificate
Business Bankruptcy Documents:
- Financial statements
- Business tax returns
- Accounts receivable and payable
- Inventory valuations
- Employee information
- Business contracts and leases
Timeline Expectations
Personal Chapter 7 cases typically follow this timeline:
- Filing to meeting of creditors: 30-45 days
- Meeting of creditors to discharge: 60-90 days
- Total time: 3-6 months
Business Chapter 11 cases are more complex:
- Filing to initial hearings: 30-60 days
- Plan development and negotiation: 6-18 months
- Plan confirmation and implementation: 12-36 months
Working with Legal Counsel
Both business and personal bankruptcy cases benefit from legal representation. An attorney can help you:
- Evaluate which type of bankruptcy serves your needs
- Prepare and file required documents
- Handle creditor communications
- Represent you in court proceedings
- Plan for post-bankruptcy financial recovery
Key Takeaways
- Personal bankruptcy eliminates or reorganizes individual debts, while business bankruptcy addresses company obligations and operations.
- Chapter 7 provides quick debt elimination through liquidation, while Chapter 13 (personal) and Chapter 11 (business) involve reorganization and payment plans.
- Michigan residents can choose between state and federal exemptions, with state exemptions potentially offering better protection for certain assets.
- Sole proprietors must file personal bankruptcy since there’s no legal distinction between the individual and business.
- Incorporated business owners can file both personal and business bankruptcy cases simultaneously if needed.
- Mixed debts require careful analysis to determine the best combination of bankruptcy types.
- Legal representation is valuable for both types of bankruptcy, given the complexity of federal law and Michigan-specific procedures.
Frequently Asked Questions
Can I file both personal and business bankruptcy at the same time? Yes, if you have both personal and business debts, you can file separate cases simultaneously. This is common for business owners who personally guaranteed business debts.
Will I lose my house if I file for bankruptcy in Michigan? Not necessarily. Michigan’s homestead exemption protects up to $40,000 in home equity ($60,000 for those over 65 or disabled). If you have more equity, you might lose the home in Chapter 7 but could keep it in Chapter 13.
How long does bankruptcy stay on my credit report? Chapter 7 bankruptcy remains on your credit report for 10 years, while Chapter 13 stays for 7 years. However, you can often qualify for new credit much sooner.
Can I keep my business if I file personal bankruptcy? If your business is incorporated and has value, it becomes part of your bankruptcy estate. However, you might be able to keep it if it falls within exemption limits or if you can buy it back from the trustee.
What debts cannot be discharged in bankruptcy? Certain debts survive bankruptcy, including most student loans, recent taxes, child support, alimony, and debts incurred through fraud.
How much does it cost to file bankruptcy in Michigan? Filing fees are $338 for Chapter 7 and $313 for Chapter 13. Business Chapter 11 costs $1,738 to file. Attorney fees vary but typically range from $1,000-$3,000 for personal cases and $10,000-$50,000 for business cases.
Can I file bankruptcy without an attorney? While legally possible, bankruptcy law is complex, and mistakes can be costly. Most people benefit from legal representation, especially in business bankruptcy cases.
How often can I file for bankruptcy? You must wait 8 years between Chapter 7 discharges, 2 years between Chapter 13 discharges, and 6 years between a Chapter 7 discharge and a Chapter 13 discharge.
Contact Us
Facing financial difficulties can feel overwhelming, but you don’t have to handle it alone. At Hammerschmidt Stickradt & Associates, we help Michigan residents and business owners make informed decisions about their financial futures.
Whether you’re dealing with personal debt, business challenges, or a combination of both, our team can evaluate your situation and recommend the best path forward. We’ll help you understand your options under Michigan law and guide you through the bankruptcy process from start to finish.
Don’t let financial stress control your life. Take the first step toward financial recovery by scheduling a consultation with our experienced bankruptcy team. We’re here to help you rebuild and move forward with confidence.
Ready to take control of your financial future? Contact Hammerschmidt Stickradt & Associates today to schedule your free consultation and learn how we can help you achieve the fresh start you deserve.
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