Written by James Frego, Bankruptcy Attorney at Frego & Associates · Michigan Bar #P55727 · Updated August 5, 2026
One slow season shouldn’t cost you your house. But in Michigan, if you run your business as a sole proprietor, it legally can.
In the eyes of the law, you and your business are the same person, so its debts are your debts. When the company can’t pay, your home, your car, and your savings are all fair game for creditors.
That risk isn’t rare. Business bankruptcy filings jumped 40.4% from 2022 to 2023, from 13,481 to 18,926, part of a 16.8% rise in total U.S. filings to 452,990 that year.[1] By 2025, business filings had reached 24,737.[2] Many of those filers are one-person operations, not big corporations.
Michigan is full of those one-person businesses. Of the state’s 983,079 small businesses, 809,426 have no employees at all.[3] Most are sole proprietors. This guide explains what bankruptcy does to them, which chapter fits, and exactly how much of your property Michigan law lets you keep.
Why Does the Sole Proprietorship Structure Matter in Bankruptcy?
A sole proprietorship is the simplest business there is: one owner, no legal separation between the person and the company. It’s also the most common kind. According to the U.S. Census Bureau, most of the nation’s nonemployer businesses, the smallest firms with no payroll, are sole proprietorships.[4]
In Michigan, you don’t file formation papers to start one. You just begin.
That simplicity comes with a catch. Because there’s no separate legal entity, every business debt is your personal debt. A corporation or LLC can shield its owner. A sole proprietorship can’t.
So when you file bankruptcy as a sole proprietor, you file as an individual. There’s no separate “business bankruptcy.” Your business debts and personal debts go into the same case. Your business assets and personal assets get counted together too.
Citation Capsule: A sole proprietor and their business are a single legal person, so one bankruptcy filing covers both at once. In Michigan, more than four out of five small businesses have no employees, the group most likely to run as sole proprietorships and carry personal liability for business debt (SBA Office of Advocacy, 2025).
Which Bankruptcy Chapter Fits a Sole Proprietor?
Three chapters are open to you, and the choice decides whether your business survives. Chapter 7 wipes out debt by selling assets. Chapter 11 and Chapter 13 keep you operating while you repay over time. Here’s how they compare.
| Factor | Chapter 7 | Chapter 11 | Chapter 13 |
|---|---|---|---|
| Best for | Closing the business and erasing debt fast | Larger operations that need to restructure heavy debt | Steady income earners who want to keep assets and repay |
| What happens to assets | Non-exempt assets are sold by a trustee | You keep assets and operate under a court plan | You keep assets and repay from future income |
| Timeline | About 3 to 6 months | Often 1 year or more | 3 to 5 year repayment plan |
| Business keeps running? | Usually no | Yes | Often yes |
Want a closer look at each one? Frego & Associates breaks down Chapter 7 liquidation, Chapter 11 reorganization, and Chapter 13 repayment in plain terms.
Most sole proprietors land in Chapter 7 or Chapter 13. Chapter 7 is faster and cheaper, but you risk losing non-exempt property. Chapter 13 costs more time, yet it lets you hold onto your assets and keep the doors open. Which trade-off makes sense depends on your income and what you’re trying to save.
What Happens to a Sole Proprietor’s Personal Assets in Michigan?
Here’s the good news most people miss: bankruptcy doesn’t take everything. Michigan exemptions let you protect a set dollar amount of each kind of property.
For cases filed on or after April 1, 2026, Michigan raised these caps by almost 11% for inflation.[5] The largest one protects the equity in your home.
The figures come from Michigan Compiled Laws section 600.5451, which the State Treasurer updates every three years.[6] Here’s what the current caps cover:
- Home equity: $51,150, or $76,725 if you’re 65+ or disabled
- Motor vehicle: $4,725
- Household goods: $775 per item, up to $5,125 total
- Tools of the trade: $3,400, which can protect the equipment your business runs on
Michigan also lets you pick the federal exemption set instead, under 11 U.S.C. section 522(d). The federal homestead is lower at $31,575, but the federal vehicle exemption runs higher at $5,025, and the wildcard gives you $1,675 plus up to $15,800 of unused homestead to apply anywhere.[7] You choose one system or the other, not both.
This is where a Chapter 7 trustee’s job comes in. The trustee can only sell what falls outside these limits. If your home equity, car, and tools all fit under the caps, you keep them. If you have equity above the cap, that extra value can be sold to pay creditors.
From our Michigan cases: Sole proprietors are often shocked at how much they keep. A contractor with a paid-off work truck, basic tools, and modest home equity frequently passes through Chapter 7 with all of it protected. The exemptions were built to let working people start over, not leave them with nothing.
How Does Bankruptcy Affect a Sole Proprietor’s Personal Credit?
Because your credit is personal credit, a filing hits your own score. Under the Fair Credit Reporting Act, a Chapter 7 bankruptcy can stay on your credit report for up to 10 years, and a Chapter 13 for up to 7 years.[8] That can make new loans, leases, and even some insurance harder to get for a while.
But “harder” isn’t “forever.” The damage fades as you rebuild. Many filers see their scores recover within a year or two by paying new bills on time and keeping balances low.
There’s also a hidden cost to not filing. Unpaid debt, lawsuits, and garnishments drag on your credit too. Sometimes a clean discharge is the faster route back to solid footing than years of falling behind.
What Should You Do Before You File in Michigan?
Preparation decides how smoothly your case goes. Federal law requires you to finish an approved credit counseling course within 180 days before you file, and most of the real work happens before that. Three steps matter most.
- Map your finances. Pull together every debt, asset, income source, and monthly expense. Sole proprietors should separate business records from personal ones, even though the case combines them.
- Weigh the alternatives. Check whether debt negotiation or consolidation could fix the problem first. Sometimes it can, and you skip the filing.
- Finish credit counseling. A short approved course is mandatory before filing. It also helps you confirm bankruptcy is the right call.
This is also the moment to talk with a lawyer. The exemption rules above only protect your property if you claim them correctly. One missed exemption can cost you an asset you could have kept.
How Does the Michigan Bankruptcy Filing Process Work?
The process follows the same path whether you owe $30,000 or $300,000, and it moves through clear stages. For a sole proprietor, four steps stand out.
Filing the Petition and Schedules
You start by filing a petition with the Michigan bankruptcy court, plus schedules of your assets, debts, income, and expenses. Accuracy matters. Incomplete or wrong paperwork can delay or even dismiss your case.
Meeting the Bankruptcy Trustee
The court appoints a trustee to review your case. The trustee values your assets, decides what’s exempt under Michigan law, and runs the 341 meeting, where you answer questions about your finances under oath. It’s usually short and routine.
The Automatic Stay Stops Collections
The moment you file, an automatic stay under 11 U.S.C. section 362 freezes collection activity. Calls stop. Lawsuits pause. Wage garnishments halt. For a stressed business owner, that breathing room arrives the same day you file.
Dealing with Creditors and Repayment
Creditors file claims, and the trustee reviews them. In a Chapter 7, the trustee distributes any non-exempt proceeds. In a Chapter 13, you repay through a court-approved 3 to 5 year plan, and the rest is discharged at the end.
Need help getting started? You can schedule a free consultation with Frego & Associates to review which chapter fits your situation.
What Are the Alternatives to Bankruptcy for Sole Proprietors?
Bankruptcy is one tool, not the only one. Before you file, it’s worth testing whether a less drastic fix could work. For many owners with manageable debt loads, it can. These are the main options.
- Debt negotiation: You or your attorney ask creditors to cut the balance or ease the terms. Creditors often prefer a partial payment over a bankruptcy write-off.
- Debt consolidation: You roll several debts into one loan, ideally at a lower rate, to simplify payments and reduce interest.
- Financial restructuring: You rework how the business spends and earns to get back to profit, sometimes with new business financing.
These paths don’t damage your credit the way a filing can. They also don’t always work, especially if the debt is large or creditors won’t budge. Frego & Associates can walk you through bankruptcy alternatives and tell you honestly whether one fits before you commit to a court filing.
Frequently Asked Questions
What Types of Bankruptcy Can a Sole Proprietor File in Michigan?
A sole proprietor can file Chapter 7 (liquidation), Chapter 11 (reorganization), or Chapter 13 (repayment plan). Because the owner and business are one legal person, the case covers both personal and business debt together. Chapter 7 erases debt fast, while Chapter 11 and 13 let you keep operating while you repay.
Which Assets Are Protected in a Michigan Bankruptcy?
Michigan exemptions protect set dollar amounts of property. For cases filed on or after April 1, 2026, that includes up to $51,150 of home equity ($76,725 if you’re 65+ or disabled), $4,725 for a vehicle, and $3,400 in tools of the trade. You can also choose the federal exemption set instead.
Can a Sole Proprietor Keep the Business Open After Filing?
It depends on the chapter. Chapter 11 and Chapter 13 are designed to let the business keep operating while you reorganize and repay. Chapter 7 usually means closing the business, since the trustee may sell non-exempt assets. Your income and goals decide which path protects the business.
How Long Does Bankruptcy Stay on a Sole Proprietor’s Credit Report?
Under the Fair Credit Reporting Act, a Chapter 7 bankruptcy can remain on your credit report for up to 10 years, and a Chapter 13 for up to 7 years. The impact fades over time. Many filers rebuild their scores within a year or two by paying new bills on time.
Are There Alternatives to Bankruptcy for Sole Proprietors?
Yes. Debt negotiation, debt consolidation, and financial restructuring can sometimes resolve debt without a filing. Business loans or grants may also help bridge a shortfall. These options can protect your credit, though they don’t always work when debt is large or creditors refuse to negotiate.
Should You Talk to a Lawyer Before Filing?
Yes. Exemptions only protect your property if you claim them correctly, and one mistake can cost you an asset you could have kept. A Michigan bankruptcy attorney can confirm which chapter fits, prepare accurate schedules, and make sure you keep everything the law allows.
Facing business debt as a sole proprietor in Michigan? Get a clear, honest read on your options.
Sources
- Administrative Office of the U.S. Courts, “Bankruptcy Filings Rise 16.8 Percent,” January 26, 2024. uscourts.gov (retrieved June 17, 2026).
- Administrative Office of the U.S. Courts, “Bankruptcy Filings Rise 11 Percent,” February 4, 2026. uscourts.gov (retrieved June 17, 2026).
- U.S. Small Business Administration, Office of Advocacy, “2025 Small Business Profile: Michigan,” 2025. advocacy.sba.gov (retrieved June 17, 2026).
- U.S. Census Bureau, “Census Bureau Releases 2023 Nonemployer Statistics,” May 15, 2025. census.gov (retrieved June 17, 2026).
- Michigan Department of Treasury, “Bankruptcy Exemption Inflation Adjustment” notice, March 2026 (effective April 1, 2026). michigan.gov (retrieved June 17, 2026).
- Michigan Legislature, Michigan Compiled Laws section 600.5451 (homestead and personal property exemptions). legislature.mi.gov (retrieved June 17, 2026).
- Federal Register, “Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases,” February 4, 2025 (effective April 1, 2025). federalregister.gov (retrieved June 17, 2026).
- Fair Credit Reporting Act, 15 U.S.C. section 1681c(a) (time limits on reporting bankruptcies).
