Colorado Small Business Bankruptcy Attorney: Ch. 7, 13 & 11 (Subchapter V)

Colorado Small Business Bankruptcy: Key Takeaways

- Small business owners have three bankruptcy options: Chapter 13, Chapter 7, and Chapter 11 (Subchapter V). - Since 2020, Subchapter V of Chapter 11 has offered a smoother, cost-effective way for small businesses to reorganize debt.  - Chapter 13 is for sole proprietors only. It lets you keep your assets and repay debts over three to five years—but only if your debts fall within the statutory limits.  - Chapter 7 liquidates business assets and closes the business. - Your personal assets can be pulled into a business bankruptcy if you made personal guarantees or, in limited cases, by a court “piercing the corporate veil.”  - Robinson & Henry has eight Front Range offices, anchored in Denver and Colorado Springs, and handles small-business bankruptcies involving personal guarantees and personal assets.

When a promising business can no longer keep up with its debts, bankruptcy can provide a legitimate path forward to resolve financial strain and regain control. Choosing the right type of bankruptcy for your small business depends on a few key factors: 

• Your business’s legal structure

• The amount and type of your debts

• Whether you’re personally liable for those debts

Small businesses have three chapters to consider under federal law:

• Chapter 13 - reorganization for individuals

• Chapter 7 - liquidation

• Chapter 11 (Subchapter V) - reorganization for small businesses

Your business’s legal structure often determines which of these applies. 

The bankruptcy chapters available to small businesses—13, 7, and 11—each come with their own process, qualifications, and stakes for your personal assets.

In my experience, Chapter 13 is often the best fit for many small-business owners. A benefit of Ch. 13 is that there is no loss of assets. Instead, you agree to repay a portion of your debts over three to five years. 

If you’re operating as a sole proprietor, you and your business are legally the same entity, meaning that your business debts will get wrapped into a personal Chapter 7 or 13 filing. 11 U.S.C. § 109.

You'll provide the court with six months of earnings history to show you can meet the terms of the repayment plan. 

Chapter 13 eligibility limits are structured as two distinct, independent thresholds, rather than a single pool of debt. The debt thresholds are updated every three years for inflation. The current limits apply to cases filed between April 1, 2025, and March 31, 2028:

• noncontingent, liquidated unsecured debts (credit cards, vendor bills) must be less than $526,700

• noncontingent, liquidated secured debts (a commercial mortgage, auto loans) must be less than $1,580,125

To qualify for Chapter 13, your debt must be under the limit in both categories.

If your business is totally underwater and has no realistic ability to repay its debts, Chapter 7 will offer the most relief. This filing sells off the business’s assets to help repay creditors, and the business closes. 

Unlike Chapter 13, a bankruptcy attorney can file a Chapter 7 petition on behalf of a partnership, corporation, or LLC. You’ll still need to provide about six months of earnings to the court. However, unlike Chapter 13, this data will be used to demonstrate that your business is incapable of repaying its debts.

In Colorado, individual debtors may keep up to $60,000 in equipment, inventory, or machinery in “tools of the trade” necessary to work, or up to $20,000 if the equipment is used for a secondary occupation. C.R.S. 13-54-102(1)(i)

Traditionally, Chapter 11 hasn’t been something I would suggest to small business owners, as it was developed for large-scale companies that could conceivably reorganize their finances and continue operating while repaying their debts. Chapter 11 has given creditors significant influence over a number of factors in the past, including the authority to vote on the reorganization plan.  However, the Small Business Reorganization Act of 2019 created a viable option for Main Street with Subchapter V. 

Think of Subchapter V as a leaner version of Chapter 11 for small businesses. Under 11 U.S.C. § 1181: 

1. The business owner remains in control of the reorganization plan - Creditors can’t file competing reorganization plans. 

2. No formal disclosure statement is required - Subchapter V drops the detailed disclosure statement that standard Chapter 11 requires, unless the court orders otherwise. 11 U.S.C. § 1181(b). In Colorado, the debtor files a short motion showing the plan provides adequate information or requesting conditional approval. 

3. It’s harder for creditors to block the plan - Subchapter V usually skips the unsecured creditors’ committee, and owners generally don’t have to solicit creditor votes to get their plan confirmed. 

4. The absolute-priority rule is gone - In standard Chapter 11, the absolute-priority rule could prevent the owner from retaining an equity interest if the business couldn’t fully repay creditors. Subchapter V removes that barrier, provided the reorganization plan is fair and equitable, and the owner’s disposable income goes toward paying down debts. 

Debtors are eligible for Subchapter V if engaged in commercial or business activity and have aggregate noncontingent, liquidated secured and unsecured debts of  $3,424,000 or less. 1 U.S.C. § 101(51D), 1182(1), 104.  

When you file for small-business bankruptcy and have one or more commercial leases, you’ll get the chance to keep (assume) the lease or reject it. 11 U.S.C. § 365 How that works depends on which chapter you file. 

• Reorganization (Chapter 11, Subchapter V and Chapter 13) - You choose to assume or reject each lease. Rejecting a lease breaches it, converting the landlord’s damage claim into general unsecured debt. This claim gets folded into your repayment plan. 

• Liquidation (Chapter 7) - A trustee winds down operations, typically rejecting commercial leases (deemed rejected after 120 days). Per 11 U.S.C. § 502(b)(6), the landlord’s damage claim is capped at the greater of one year’s rent or 15 percent of the remaining term (for a maximum of three years), in addition to any unpaid rent from before the filing. 

A Warning on Personal Guarantees

Regardless of what chapter you file, a personal guarantee is treated as a promise separate from a business. So, for instance, if you opened a coffee shop through an LLC, but the landlord required you to sign the lease in your name, you can still be sued personally for the remaining rent unless your own discharge covers the guarantee. 

If your business is a corporation or LLC, the law generally treats your personal assets as separate from the business. But Colorado law provides two ways that separation can disintegrate, putting your personal assets at risk. 

As a small-business owner, you can pull your personal assets into bankruptcy proceedings when you:

• Sign a personal guarantee to get a loan that the lender wouldn’t otherwise have made to your business

• Use personal credit cards or a home equity line of credit to pay business expenses

• Pledge your house, car, or other personal property as collateral. 

Pandemic-era SBA Economic Injury Disaster Loans (EIDL) above $200,000 required a personal guarantee. 

Generally, when small businesses have personal guarantees, I will recommend filing a concurrent personal Chapter 7 or Chapter 13 to protect you from further unwanted exposure. 

Owners of LLCs and corporations are generally shielded from personal liability, but under Colorado law, a court may hold you responsible for the entity’s debts if you abused it to commit fraud or other wrongdoing. This action, called piercing the corporate veil, is an extraordinary remedy in which courts require a clear and convincing showing of a three-part test: 

1. The entity is an alter ego or “mere instrumentality” of the owner;

2. The corporate/LLC form was used to perpetuate a fraud or defeat a rightful claim; and

3. Disregarding the entity form achieves an equitable result.

To decide whether the entity is an “alter ego,” Colorado courts weigh the following eight factors:

1. Separate operation - whether the business is actually run as a distinct entity, not as an extension of the owner.

2. Commingled funds - mixing business and personal money or assets.

3. Inadequate records - whether the entity keeps proper corporate and financial records.

4. Ownership and control - whether the form of ownership and control makes insider misuse easy. 

5. Thin capitalization - whether the business is funded with too little capital for its obligations.

6. Mere shell - maintaining an entity that exists only on paper, with no real substance.

7. Disregarded formalities - whether required legal formalities are ignored.

8. Non-entity use of assets - whether business funds or assets are used for the owner’s personal purposes. 

If the court decides to “pierce the corporate veil,” I might also suggest filing for personal bankruptcy alongside your business. 

Learn more about what triggers a court to lift liability protections in our article, Colorado LLC Defense: Protect Personal Assets & Business. 

While bankruptcy wipes out many general business debts, collected sales tax and employee payroll withholdings—also called “trust fund” taxes—are generally not eligible for discharge. Importantly, the IRS and Colorado Department of Revenue can assess these debts against you personally, no matter your corporate structure. 

Once your bankruptcy petition is filed, federal law triggers an automatic stay, halting all ongoing creditor actions against debtors. From there, you must file your chapter within 14 days of the petition in the U.S. Bankruptcy Court for the District of Colorado. 

A bankruptcy attorney can help you file fast so that your automatic stay takes effect quickly and provides you with some breathing room. 

If your company is struggling with debt and you need to protect your business—and yourself—from liability, a Colorado bankruptcy attorney can give you real legal clarity fast. Every bankruptcy filing is different. Robinson & Henry’s Front Range bankruptcy attorneys can provide legal guidance in cases where: 

• You want to keep your business operating while restructuring debts through Subchapter V of Chapter 11. 

• You signed personal guarantees, pledged personal assets, or commingled funds to pay business expenses.

• Your debt balances are approaching or exceeding the statutory limits required for Chapter 13. 

• You need to shut down operations and liquidate business assets cleanly through Chapter 7.

• Creditors are threatening lawsuits, asset seizure, or attempts to hold you personally liable. 

With offices in Broomfield, Colorado Springs, and the Denver metro area, our experienced bankruptcy attorneys protect small-business owners from personal liability. Call 303-688-0944 or book your consultation online now to begin.