German YusufovSeptember 8, 2025

Filing for bankruptcy is a big step, and it hits harder when you own a business. You might wonder what happens to your equipment, inventory, business debt, or the company’s credit profile. At Yusufov Law Firm, PLLC, serving Tucson, Mesa, and Phoenix, we help Arizonans cut through the stress and get back on solid ground.

Our goal is simple: help you solve debt problems in a way that protects what matters most. In this article, we explain how a personal bankruptcy filing can touch your business assets and credit, and we outline options that can keep the doors open or let you start fresh the right way.

The Interplay Between Personal & Business Bankruptcy

Bankruptcy exists to give people a usable path out of debt and a clean start. It can end collection lawsuits and stop harassment, which eases pressure while you work on a plan to rebuild your finances. In most cases, it also blocks a pending foreclosure or repossession, giving valuable time to regroup.

Personal bankruptcy is filed by you as an individual, while business bankruptcy is filed by the company as its own legal person. Business owners sometimes file one, sometimes both, and the right choice depends on the structure of the business, the debts that you and the business have, and your goals.

Once a case is filed, the automatic stay kicks in, and most collection activity must stop. The automatic stay:

  • Stops wage garnishment and bank levies.
  • Pauses foreclosure and most repossessions.
  • Halts collection calls and lawsuits against you.

What is important to understand is that the automatic stay protect the party filing for bankruptcy. If you file for bankruptcy in your own name, the automatic stay protects you personally, and not your business entity.  If the business entity files for bankruptcy, then the automatic stay protects the business entity and not (usually) you personally.

Personal Bankruptcy: Impact on Business Assets

How your personal case affects business property hinges on the way your company is set up, the chapter you file, and whether you signed personal guarantees. Arizona exemption laws and the value of your tools and equipment also play a big part.

Types of Business Structures & Their Implications

If you run a sole proprietorship, there is no legal wall between you and the business. The tools, inventory, and receivables are treated as your assets, so they are part of your bankruptcy estate.

Partnerships, LLCs, and corporations are separate legal entities. In a personal case, you own an interest in the company, not the company’s assets. In other words, your interest in the company is your personal asset, but the equipment, inventory, and other business assets belong to the company, not you personally.   However, the value of the equipment, inventory, and other assets that a company has can affect the value of the company itself, and the more valuable the company, the more valuable your interest in the company.

What happens to the business assets and to your interest in the company will depend on the type of bankruptcy filed.

Chapter 7 vs. Chapter 13 Bankruptcy

Chapter 7 is a liquidation. A trustee reviews your property and can sell nonexempt assets to pay creditors.  If you run the business as a sole proprietorship, your nonexempt assets will include your equipment, inventory, and other business assets above an amount set by state law.  If you run your business through a separate legal entity, the trustee cannot directly sell the business assets.  However, the trustee can sell your interest in the company.  In addition, if you are the only member or shareholder of the company, the trustee can take over the company from you and then sell its assets. For this reason, Chapter 7 is usually not a good option if you have a successful business that you want to continue operating.

Chapter 13 is a three- to five-year repayment plan. You keep your property and pay creditors based on your income and the value of any nonexempt assets.   With Chapter 13, you can keep all business assets if you are a sole proprietor, and you can keep the company if you run the business through a separate legal entity.  This makes Chapter 13 a good option if you need to file a bankruptcy for personal debt but have a business that you want to continue operating.

Exemptions: Protecting Your Business Assets in Arizona

Exemptions are laws that let you protect certain property in bankruptcy. Arizona has its own exemption laws, and residents use Arizona exemptions once they meet residency requirements.

Arizona law allows business owners who run a business as a sole proprietorship to protect business assets under the “tools of the trade” exemption. The amount that can be protected is set by Arizona statutes, and is $5,000 at the time this article is written.

Valuation of Business Assets

Getting values right matters. The number you place on equipment or inventory will influence whether it is fully exempt, needs to be sold, or must be accounted for in a Chapter 13 plan.

Courts and trustees look at fair market value, liens and loans tied to the item, and how quickly it could sell.

Good records, recent photos, and any appraisals can make this part smoother and reduce disputes about worth.

Personal Bankruptcy: Impact on Debt

Another important factor to consider is how your personal bankruptcy will affect business debt.  The answer will again depend on how your business is set up.

If your business is a sole proprietorship, then your business debt is really your personal debt, and you can eliminate it in your personal bankruptcy.  If your business is a partnership, you are personally responsible for all business debt, but can also eliminate it in your personal bankruptcy.

If your business is a LLC, corporation, or another legal entity, then the business debt is not your personal responsibilty.  But, when it comes to small businesses, the owners will usually be required to sign a personal guarantee in order for the business to get a loan or line of credit.  If this happens, then you can wipe out your liability on the guarantee when you file for personal bankruptcy.  On the other hand, your personal bankruptcy will eliminate the responsibility of the LLC or corporation to pay its debt.  This means that lawsuits against a LLC or corporation, or another legal entity, usually continue even if you file for bankruptcy personally.  In order for the business entity to eliminate its debt, that business entity would itself have to file for bankruptcy.

To make these rules easier to see, here is a quick comparison based on structure and chapter:

Structure Who Owns Assets Personal Guarantees Chapter 7 Impact Chapter 13 Impact
Sole Proprietorship You personally Often present on cards, leases, and loans Trustee can sell nonexempt tools, inventory, and receivables Keep assets, pay nonexempt value through the plan
Partnership Partnership entity Common, plus partner exposure Trustee can sell your partnership interest Keep interest, pay its nonexempt value over time
LLC or Corporation Company owns them Common on loans, leases and lines of credit Trustee can take your shares or membership interest Keep ownership, pay nonexempt value in the plan

 

This chart is a snapshot, and small facts can swing outcomes, so it is important to consult with an attorney about your specific situation.

 

Personal Bankruptcy: Impact on Credit

Your personal filing will affect both your personal credit and, sometimes, your business credit. The size of the hit depends on the chapter, your current scores, and how your business borrowing is structured.

Personal Credit Score

A bankruptcy drops your scores at first. A Chapter 7 can show on your personal report for up to 10 years, and a Chapter 13 for up to seven years.

You can still rebuild faster than most people think by adding small, positive lines. Many clients start with these simple moves:

  • Open a secured credit card, keep usage under 30 percent, and pay in full.
  • Add a small credit-builder loan or report on-time rent with a reputable service.
  • Set auto pay for all bills and scrub errors from your reports every few months.

Scores tend to climb as new positive history replaces the old negatives, and that helps when you need business funding later.

Business Credit Score

If you signed a personal guarantee for a business loan or lease, a personal filing can trigger negative marks on your personal reports. Vendors and lenders can also look at public records, so they may see the filing.

If your company is a separate legal entity and you did not personally guarantee the debt, the business credit profile usually stays apart. True separation works best when the company has its own bank account, EIN, vendor trade lines, and clear books.

If business accounts were reported on your personal credit, and you did not sign a personal guarantee, the credit report entry should be disputed with the credit bureaus.

Securing Future Financing

Getting loans after bankruptcy can be harder at first, but not impossible. Lenders want to see steady income, a realistic plan, and proof that you can handle payments.

You can widen choices by looking at sources that work with post-bankruptcy owners.

  • SBA microloans and community development lenders that underwrite based on cash flow.
  • Vendor terms with small limits that report positive payment history.
  • Co-owners who invest cash, or collateral that lowers lender risk.
  • Well-drafted forecasts that show margins, break-even points, and cash reserves can help in obtaining a business loan.

Strong books, clean tax filings, and a short track record of on-time payments go a long way with underwriters.

Considerations for Starting a New Business After Bankruptcy

Plenty of people launch new companies after a bankruptcy discharge. It just takes planning, clean separation between personal and business money, and a funding path that fits your plan and goals.

Legal Structure

Forming an LLC or corporation can protect you from personal liability for new business debts. Keep the company’s bank account, EIN, books, and contracts separate from your personal life to maintain that shield.

Lenders often ask for guarantees from new owners, so compare offers and push for limited or burn-off guarantees when you can. Careful setup now can prevent old problems from repeating.

Business Plan

A clear, lean plan helps lenders and investors see how the business gets to profit. Focus on who you serve, how you price, what it costs to deliver, and when cash turns positive.

Include a simple monthly budget and show how you would handle a slower sales month. That kind of detail helps build confidence.

Financing

Funding can come from several places. Partners, local investors, SBA-backed lenders, and city or county grants often step in where big banks pass. Many owners stack smaller lines of credit to reduce risk and cost.

Keep paperwork tight, show recent tax returns, and bring proof of demand, like signed letters of intent or early purchase orders. That evidence has real weight with lenders.

You should feel comfortable asking questions and getting straight answers at every step. A short conversation can save months of stress and protect assets you worked hard to build.

Take Control of Your Financial Future: Contact Us Today

At Yusufov Law Firm, PLLC, we help individuals and business owners stop collection pressure, protect homes, and rebuild smarter. If you want a practical plan that fits your situation, reach out for a consultation and case review. Call us at 520-745-4429 (Tucson) or 480-788-0098 (Phoenix), or visit our Contact Us page to get started. We work hard to pursue the best possible outcome for you and your business, and we welcome your questions.