Sole Proprietor Bankruptcy: What Happens to Your Business, Assets and Debts

The line between personal and business does not hold. Unlike an LLC, a sole proprietor has no separate property that alone answers for the business. For debts to suppliers, a bank or the tax authority, they answer with everything they own: a flat, a car, deposits, a stake in someone else’s business. That is why the procedure almost always affects the family and household spending, not just the trade or production.

There is no separate procedure for sole proprietors. The same rules of Federal Law No. 127-FZ on Insolvency (Bankruptcy) apply to an entrepreneur as to any individual, plus a few special features for a former business. The petition is filed not with the district court but with the commercial (arbitrazh) court of the region where the person lives.

Closing the sole proprietorship will not make the debts go away. Ending the registration cancels no obligation: the business’s debts simply become the individual’s debts, and creditors continue recovery. Bankruptcy can also be pursued after the sole proprietorship is closed, and debts linked to the former business are dealt with in the same procedure.

Sometimes filing is mandatory. If debts total at least RUB 500,000 and it is clear that all creditors cannot be paid, the entrepreneur has 30 working days to go to court personally, counted from the moment this became clear. Failing to file carries an administrative fine, and creditors later use the delay as an argument that the debtor acted in bad faith.

Equipment, vehicles and stock. Everything the business ran on is sold together with personal property: machinery, lorries, warehouse stock, customers’ receivables. The law protects only items needed for professional work, and only if they are worth no more than 100 minimum wages. So it is almost impossible to keep an expensive machine or lorry.

The only home. The flat or house where the entrepreneur lives with the family generally stays with them if it is not mortgaged. In 2021 the Constitutional Court allowed an exception for clearly luxurious housing: the court may sell it and buy the debtor a more modest home. For an ordinary flat this risk is minimal. For more on protecting the home, see the section on personal bankruptcy.

Spouses’ property. Property acquired jointly during the marriage is also sold, but the spouse is paid their share of the proceeds. Creditors challenge first of all a prenuptial agreement concluded shortly before the procedure and any division of property in favour of the spouse.

Stakes in companies. If the entrepreneur also held a stake in an LLC, it is sold at auction like any other property. If they also managed that LLC, it is worth assessing the risk of subsidiary liability in advance: bankruptcy does not write off such debts.

Re-registering a car or equipment in a relative’s name. The manager finds such transactions in the first weeks of the procedure and challenges them. The property returns to the estate, and the very fact of the transfer becomes grounds to refuse to write off the debts.

Continuing to trade on credit despite obvious insolvency. New loans and shipments without payment, made when the debts could no longer be repaid, are treated by the court as bad faith.

Forgetting the employees. Wage debts are not written off, so an entrepreneur counting on “closing everything in one procedure” often comes out of it still owing money to former staff.

Entering the procedure without an assessment. Sometimes bankruptcy is not worthwhile: the assets exceed the debts, or the main debt is of a kind that is not written off. An honest assessment before filing saves months and money. The outcome of the procedure depends on the debtor’s good faith and the court’s decision, and nobody can guarantee a write-off.