By the time a New Mexico business owner searches “bankruptcy,” the question is rarely whether there is a problem. It is which tool fits: liquidate, reorganize, or absorb the business debt personally and save the household. The Bankruptcy Code offers four realistic doors, and choosing the wrong one wastes money and sometimes forfeits options that cannot be recovered. This guide walks the decision the way we walk it with clients: first what you want to survive, then what the eligibility rules allow, then what each chapter costs in time and control. The statutes referenced here govern in every state, but the numbers, exemptions, and courtroom logistics below are New Mexico’s.
What is the first question: save the business, or save the owner?
Everything branches from this. If the company has a real future, revenue, customers, a reason to exist, the analysis heads toward reorganization: Subchapter V for most closely held businesses, traditional Chapter 11 above its debt cap. If the company is done, the question flips: an orderly wind-down, sometimes through a corporate Chapter 7, sometimes outside bankruptcy entirely, and then damage control for the owner, who usually signed personal guarantees. Owners consistently underestimate that second half. Entity liability dies with the entity; guarantee liability follows you home, and it is the owner’s personal filing, a Chapter 7, a Chapter 13, or even a personal Subchapter V, that resolves it.
When is Chapter 7 the right call, and when is it a mistake?
For an individual former owner whose debts are mostly guarantees and business obligations, Chapter 7 is often clean and fast: the means test of 11 U.S.C. § 707(b) does not even apply when debts are primarily non-consumer, and New Mexico’s post-2023 exemptions protect the house up to $150,000 of equity per owner, vehicles, tools, and household goods at levels that make most cases no-asset. For the company itself, Chapter 7 is more situational. A corporate Chapter 7 hands the keys to a trustee for an orderly liquidation, useful when owners want a neutral party to sell assets and face creditors. But corporations and LLCs receive no discharge in Chapter 7 under § 727(a)(1); the entity just dies with its debts formally administered. When there is nothing to administer, dissolving under state law without a filing is sometimes the cheaper funeral. The mistake to avoid: filing the company and assuming the owner’s guarantees somehow went with it. They did not.
What does Chapter 13 do for a business owner that Chapter 7 cannot?
Chapter 13 is individuals-only, but sole proprietors file it while continuing to operate, and owners of entities use it to handle the personal side when they have income worth protecting and assets worth keeping. Its signature strengths: stopping a home foreclosure and curing arrears over three to five years, restructuring vehicle and equipment loans, paying priority taxes through the plan while penalties stop accruing, and a co-debtor stay under § 1301 that shields a spouse who co-signed. The gate is § 109(e)’s debt limits, $526,700 unsecured and $1,580,125 secured for cases filed on or after April 1, 2025, and guarantee-heavy owners blow through the unsecured cap more often than they expect. Over the line, the fallback is individual Chapter 11 or, when the debts are primarily business debts, a personal Subchapter V, which usually beats both.
Why has Subchapter V become the default answer for small companies?
Because Congress built it to fix everything owners hated about Chapter 11. Under 11 U.S.C. § 1182(1), a business, or an owner whose debts are at least half business debts, qualifies with total noncontingent, liquidated debt at or below $3,424,000. Inside that gate the deal is dramatically better: only the debtor may file a plan, the plan is due in 90 days, no creditors’ committee, no disclosure statement, no quarterly U.S. Trustee fees, and, the crown jewel, no absolute priority rule, so the owner keeps the company by committing projected disposable income for three to five years even over creditor objection. A Subchapter V trustee is appointed as a facilitator, not an operator. For a Las Cruces contractor or a Farmington trucking company with $1.5 million of debt, this is almost always the reorganization conversation, and the eligibility math, what counts as noncontingent and liquidated, what percentage is business debt, is exactly the kind of analysis to get right before filing, not after a motion to strike the election.
Where does traditional Chapter 11 still earn its keep?
Above the Subchapter V cap, for single-asset real estate cases that Subchapter V excludes, and for fights that need its heavyweight tools: sales free and clear of liens under § 363(f), court-approved DIP financing under § 364, and cramdown confirmation under § 1129(b). It is the most expensive door in the building, which is why the screening order matters: Subchapter V first, traditional Chapter 11 only when the facts demand it.
| Chapter 7 | Chapter 13 | Subchapter V | Chapter 11 | |
|---|---|---|---|---|
| Who files | Individuals & entities | Individuals only | Businesses & owners, ≥50% business debt | Anyone |
| Debt limits | None | $526,700 / $1,580,125 | $3,424,000 | None |
| Business keeps operating | No (liquidation) | Sole proprietors yes | Yes, owner in control | Yes, owner in control |
| Owner keeps equity | N/A | N/A | Yes, via disposable income plan | Only if plan satisfies absolute priority |
| Typical timeline | 3-4 months | 3-5 years | Plan in 90 days; 3-5 year payments | Months to years |
| Relative cost | $ | $$ | $$$ | $$$$$ |
What is different about doing this in New Mexico?
Three things help. The whole state is one bankruptcy district, administered from Albuquerque, and meetings of creditors and most hearings run by phone or video, so geography is no longer a tax on rural businesses. New Mexico’s 2023 exemption overhaul means the owner’s personal filing protects far more property than it would have five years ago. And because tax debt, IRS liabilities and New Mexico gross receipts tax assessments, sits near the center of most business insolvencies here, the chapter choice and the tax strategy have to be made together: priority taxes ride through every chapter under § 507(a)(8), trust-fund and GRT responsible-person exposure follows owners personally, and the timing rules that make older income taxes dischargeable can make a sixty-day wait worth five figures.
Frequently Asked Questions
Can I just close the LLC and walk away without filing anything?
Sometimes, if the entity has no assets worth administering and you signed no guarantees. But creditors of a dissolved entity can pursue distributed assets, and guaranteed debts follow you regardless. Get the guarantee inventory done before choosing the do-nothing option.
My debts are $700,000, mostly from the business. Am I over the Chapter 13 limit?
Likely over the unsecured cap, but that is not the end. If at least half your debt arose from business activity, a personal Subchapter V is usually available up to $3,424,000, and it imports Chapter 13-style flexibility with better terms for you as owner.
Will filing for the business stop the IRS from coming after me personally?
No. The trust-fund recovery penalty under 26 U.S.C. § 6672 and New Mexico responsible-person GRT assessments attach to you, not the entity, and the company’s automatic stay does not shield you. Personal exposure needs its own strategy, sometimes its own filing.
How fast can a filing stop a foreclosure or levy on business assets?
Immediately. The automatic stay of 11 U.S.C. § 362 takes effect the moment any chapter’s petition is filed, halting foreclosures, repossessions, levies, and lawsuits while the strategy plays out.
What if my business debt is just above the Subchapter V cap?
Run the numbers carefully before conceding: contingent and disputed debts do not count toward the cap, and guarantee liability is often contingent. If you are genuinely over, traditional Chapter 11 remains available, and Congress continues to debate restoring the higher pandemic-era cap.
How North Star Law Firm Can Help
North Star Law Firm runs the chapter-selection analysis for New Mexico business owners as a single engagement: entity and personal exposure, eligibility math under §§ 109(e) and 1182, exemption planning, and the tax strategy that has to travel with it. Phillip Zagotti, JD/CPA, practices in the United States Bankruptcy Court for the District of New Mexico and represents taxpayers before the IRS under Circular 230, which means the cash-flow projections, liquidation analyses, and tax claim treatment are built in-house rather than outsourced. Start with the firm’s bankruptcy practice overview, or go straight to the deep dives on Chapter 7, Chapter 13, Chapter 11, and Subchapter V. Then contact North Star Law Firm for a free strategy session before the next creditor moves first.