Business Bankruptcy and New York Estates: Questions and Answers for Executors, Heirs and Family-Owned Companies

This page answers the questions we get from New York executors, administrators, heirs and owners of closely held companies when a business and a death collide: the founder dies and the company is insolvent, the decedent's company is already in Chapter 11, or a family member signed a personal guarantee and now the bank is calling the estate. It is written for the Southern and Eastern Districts of New York, where most of our clients' matters arise, and it cites the specific statutes and local rules that control. For an overview of the firm's bankruptcy services, including consumer cases, see our bankruptcy overview. This page is the deeper guide on the business-and-estate side.

Can a deceased person's estate file for bankruptcy in New York?

No. Only a "person" may be a debtor under 11 U.S.C. § 109(a), and the Bankruptcy Code's definition of "person" in 11 U.S.C. § 101(41) covers individuals, partnerships and corporations. A decedent's estate is none of those. Bankruptcy courts have consistently dismissed petitions filed on behalf of a probate estate.

An insolvent estate is handled in Surrogate's Court instead. SCPA § 1811 sets the order in which an executor pays debts when there is not enough to go around: funeral and administration expenses first, then debts entitled to preference under federal law, then taxes and judgments, then everything else. The federal preference matters more than most executors expect. Under 31 U.S.C. § 3713, a fiduciary who pays other creditors before a known federal claim, such as unpaid payroll taxes from the decedent's company, can be held personally liable for the shortfall.

The company itself is a different story. If the decedent owned a corporation or an LLC, that entity is a "person" and can file its own Chapter 7 or Chapter 11 case. The estate, as the new owner of the shares or membership interest, decides whether it should. See our pages on estate administration and letters testamentary for how an executor obtains the authority to act.

What happens to a New York business when the owner dies insolvent?

The answer depends on how the business was organized.

• Sole proprietorship: There is no separate entity. The business assets and the business debts are the decedent's own, and they pass into the probate estate. The executor marshals the assets, presents creditors with the seven-month claims window under SCPA §§ 1802 and 1803, and pays claims in the SCPA § 1811 order. If the estate is insolvent, unsecured creditors are paid pro rata and heirs receive nothing.
• LLC: The membership interest passes to the estate. Under New York LLC Law § 608, the executor may exercise the deceased member's rights for the purpose of settling the estate, but the operating agreement controls whether the estate can become a full member or must be bought out. The LLC's debts remain the LLC's debts unless the decedent guaranteed them personally.
• Corporation: The shares pass to the estate. Same rule: corporate debt stays with the corporation, and the estate is exposed only through personal guarantees, unpaid trust-fund taxes for which the decedent was a responsible person, or transfers that can be unwound.

One New York rule trips up executors in every category. An executor has no general authority to keep running a decedent's business. Unless the will expressly grants that power, the executor must petition the Surrogate's Court under SCPA § 2108 for authority to continue the business. An executor who operates the company without that authority can be surcharged personally for any losses. If the business is losing money and the executor wants to keep it open long enough to sell it or file a Chapter 11, obtain the § 2108 order first.

I am the executor and the decedent's company is already in Chapter 11. What are my duties?

You wear two or three hats at once, and they do not always point the same way.

• Equity holder: The estate now owns the decedent's shares or membership interest. In a traditional Chapter 11, the absolute priority rule in 11 U.S.C. § 1129(b)(2)(B) means equity receives nothing under a nonconsensual plan unless every senior class is paid in full. Do not value the business interest on the estate's inventory as if the company were solvent. Subchapter V changes this result, as explained below.
• Creditor: Founders routinely lend money to their own companies. If the decedent did, the estate is a creditor and must file a proof of claim before the bar date set under Fed. R. Bankr. P. 3003(c). Miss the bar date and the claim is gone. Because the decedent was an insider, expect the company's other creditors to scrutinize whether the loan was really a loan or an equity contribution.
• Debtor on guarantees: If the decedent personally guaranteed the company's bank line, lease or vendor accounts, those creditors have claims against the estate. They must present them within the SCPA § 1802 window, and you may reject a claim under SCPA § 1806 if you believe it is not owed. The company's bankruptcy does not pause these claims, as the next question explains.

You also owe the ordinary duties of a New York fiduciary to the estate's beneficiaries, including the duty to account. A beneficiary who believes the executor mishandled the business interest can bring a proceeding for breach of fiduciary duty or compel an accounting. Keep a separate file documenting every decision about the company and the advice you relied on.

Does the company's automatic stay protect the owner, the owner's estate or heirs who signed personal guarantees?

No. The automatic stay under 11 U.S.C. § 362(a) protects the debtor and the debtor's property. It does not protect a non-debtor guarantor, and the Second Circuit has said so directly. In Teachers Insurance & Annuity Association v. Butler, 803 F.2d 61 (2d Cir. 1986), the court held that a creditor may proceed against guarantors of a Chapter 11 debtor's obligations. The co-debtor stay that some people have heard of exists only in Chapter 13 (11 U.S.C. § 1301) and Chapter 12, and only for consumer debts. There is no equivalent in Chapter 11.

A bankruptcy court can extend the stay to a non-debtor under 11 U.S.C. § 105(a), but the Second Circuit limits this to unusual circumstances. In Queenie, Ltd. v. Nygard International, 321 F.3d 282 (2d Cir. 2003), the court explained that the stay reaches a non-debtor only where a judgment against the non-debtor would have an immediate adverse economic consequence for the debtor's estate, such as a claim for which the debtor must indemnify the non-debtor. A guarantor who simply owes the same debt as the company does not qualify.

Nor can the company's plan quietly release the guarantor. In Harrington v. Purdue Pharma L.P., decided by the Supreme Court in June 2024 on appeal from the Southern District of New York, the Court held that the Bankruptcy Code does not authorize a plan to release claims against non-debtors without the consent of the affected creditors. A family business cannot use its own Chapter 11 to wipe out the bank's claim against the founder's estate unless the bank agrees.

For the estate, the practical result is that guarantee claims must be reserved for, negotiated or litigated in Surrogate's Court on their own track while the company's case proceeds in federal court. If the guarantor was the decedent's spouse rather than the decedent, see am I responsible for my spouse's debt in New York.

Can my New York family business file under Subchapter V?

For most of the family-owned companies we see, Subchapter V of Chapter 11 (11 U.S.C. §§ 1181–1195) is the path worth examining first. It was added by the Small Business Reorganization Act of 2019 and it removes much of what makes a traditional Chapter 11 unaffordable for a small business.

Eligibility, under 11 U.S.C. § 1182(1):

• The debtor is a person engaged in commercial or business activities.
• Total noncontingent, liquidated secured and unsecured debt does not exceed $3,424,000 (the figure in effect after the April 1, 2025 inflation adjustment). The temporary $7.5 million ceiling that applied during and after the pandemic expired on June 21, 2024 and has not been renewed as of this page's last review.
• At least 50 percent of that debt arose from the debtor's commercial or business activities.
• The debtor is not a single-asset real estate debtor and not a public company.

What changes once the debtor elects Subchapter V:

• Owners keep the company: Under 11 U.S.C. § 1191(c), the court can confirm a plan over creditor objection without applying the absolute priority rule, as long as the plan commits the debtor's projected disposable income for three to five years and is fair and equitable. The founder's heirs can retain the equity even though unsecured creditors are not paid in full. This is the single biggest difference from a traditional Chapter 11 and the reason Subchapter V matters for business succession.
• No creditors' committee and no disclosure statement: Section 1181(b) switches off the committee and disclosure-statement provisions unless the court orders otherwise. That removes the largest source of professional fees in a small case.
• A Subchapter V trustee: Under 11 U.S.C. § 1183, the U.S. Trustee for Region 2 appoints a trustee from its Subchapter V panel. The trustee does not take over the business. The trustee's job is to facilitate a consensual plan, and in a nonconsensual case to receive and disburse plan payments.
• Fast deadlines: The court holds a status conference within 60 days of filing under § 1188(a); the debtor files a report 14 days before it under § 1188(c); and the plan is due within 90 days of the order for relief under § 1189(b). Only the debtor may file a plan.
• Discharge: In a consensual plan the discharge comes at confirmation. In a nonconsensual plan, under § 1192, it comes after the debtor completes all payments due in the first three years (or longer period the court fixes).

Two cautions. First, an executor cannot make the Subchapter V election for the company without authority over the entity, which usually means the SCPA § 2108 order or a corporate resolution by the estate as shareholder. Second, Subchapter V debtors still owe quarterly U.S. Trustee fees under 28 U.S.C. § 1930(a)(6), discussed below.

How long does a business Chapter 11 take in New York?

• Subchapter V: The plan must be filed within 90 days. Confirmation hearings in SDNY and EDNY are commonly scheduled within a few months after that, so a cooperative case can be confirmed in roughly four to seven months. Contested cases take longer.
• Small business case (non-Subchapter V): If the debtor meets the definition in 11 U.S.C. § 101(51D) but does not elect Subchapter V, § 1121(e) gives the debtor 180 days of exclusivity and requires the plan to be filed within 300 days, and § 1129(e) requires confirmation within 45 days after the plan is filed unless extended.
• Traditional Chapter 11: The debtor has 120 days of exclusivity to file a plan and 180 days to solicit acceptances under § 1121(b)–(c). The court may extend those periods to a maximum of 18 and 20 months under § 1121(d)(2). Cases involving litigation over claims or avoidance actions routinely run a year or more.

The probate clock runs at the same time. The seven-month claims period, the estate tax return due nine months after death, and the executor's accounting all have their own deadlines. Our sample NYC probate timeline shows the Surrogate's Court side; the two schedules have to be coordinated so that the estate does not distribute to heirs while a guarantee claim or an avoidance claim against the decedent is still open.

What does a Chapter 11 cost in New York?

Filing fee: The Chapter 11 filing fee under 28 U.S.C. § 1930(a)(3) is $1,167, plus a $571 administrative fee, for a total of $1,738 payable to the clerk at filing. A Chapter 7 case costs $338.

Quarterly U.S. Trustee fees: Every Chapter 11 debtor, including a Subchapter V debtor, pays a quarterly fee under 28 U.S.C. § 1930(a)(6) based on disbursements made during the quarter. The statutory scale for quarters with disbursements under $1 million is:

• Less than $15,000: $250
• $15,000 to $74,999.99: $325
• $75,000 to $149,999.99: $650
• $150,000 to $224,999.99: $1,625
• $225,000 to $299,999.99: $1,950
• $300,000 to $999,999.99: $4,875

For quarters with disbursements of $1 million or more, the fee is 0.4 percent of disbursements (0.8 percent during any period in which the U.S. Trustee System Fund balance falls below the statutory threshold), capped at $250,000 per quarter. Note that "disbursements" means everything the business pays out, including payroll and rent, not just payments to creditors. Fees are due on the last day of the month following each calendar quarter, and the fee continues until the case is closed, dismissed or converted. Confirm current amounts with the U.S. Trustee before budgeting, since the percentage rate adjusts by statute.

Professional fees: Debtor's counsel, any accountant or financial advisor, and the Subchapter V trustee are paid from the estate only after court approval under 11 U.S.C. §§ 330 and 331. Retention must be approved under § 327, and the U.S. Trustee reviews every application against the fee guidelines in 28 C.F.R. Part 58, Appendix A. Professional fees are the largest cost in nearly every case. Subchapter V keeps them down by eliminating the committee and the disclosure statement, but the debtor should expect to fund a retainer before filing and should have a realistic 13-week cash flow forecast showing it can pay administrative expenses as they come due. A plan that cannot pay its own professionals is not feasible and will not be confirmed.

Which New York court hears the case, and which local rules apply?

Venue is governed by 28 U.S.C. § 1408: the district where the company is domiciled (its state of formation), where it has its principal place of business, or where its principal assets are located. A New York LLC operating in Queens belongs in the Eastern District; one operating in Manhattan, the Bronx, Westchester or the lower Hudson Valley belongs in the Southern District. The Eastern District sits in Brooklyn and Central Islip and covers Brooklyn, Queens, Staten Island, Nassau and Suffolk. The Southern District sits in Manhattan, White Plains and Poughkeepsie. The Northern and Western Districts cover upstate.

The local rules that matter most in a small business case:

• SDNY Local Bankruptcy Rule 1007-2: Every Chapter 11 petition in the Southern District must be accompanied by an affidavit (or declaration) describing the nature of the business and the circumstances leading to the filing, listing the 20 largest unsecured creditors and the five largest secured creditors, summarizing assets and liabilities, identifying pending lawsuits, premises and the location of books and records, and estimating payroll and cash receipts and disbursements for the first 30 days. If the founder has just died, this affidavit is where the court first learns who is now running the company and under what authority. The Eastern District imposes a comparable affidavit requirement in its Local Bankruptcy Rules; confirm the current rule text and the assigned judge's chambers rules before filing.
• SDNY Local Bankruptcy Rule 4001-2: Any motion to use cash collateral or obtain post-petition financing must flag, in a separate section near the front of the motion, provisions the court treats as extraordinary, such as cross-collateralization, roll-ups of pre-petition debt, waivers of the estate's avoidance claims, and short deadlines for challenging the lender's liens. A family business whose bank wants a lien on everything as the price of consent should expect the judge to look hard at these terms.
• SDNY Complex Case procedures: The Southern District's guidelines for complex Chapter 11 cases apply to debtors with $100 million or more in liabilities or publicly traded securities. A family-owned company will almost never meet that threshold, and the first-day practice described in large-case coverage does not apply to it. Small cases are heard on the ordinary motion calendar.
• U.S. Trustee Region 2 operating requirements: On filing, the debtor must close its pre-petition bank accounts and open debtor-in-possession accounts at an authorized depository, maintain insurance and provide proof of it, attend an initial debtor interview with the U.S. Trustee's analyst, and file monthly operating reports on the national form (UST Form 11-MOR) required by 28 C.F.R. § 58.8. The U.S. Trustee also conducts the § 341 meeting of creditors. Noncompliance with these requirements is the most common ground for a motion to convert or dismiss under 11 U.S.C. § 1112(b).

The decedent paid family members or moved assets before the business failed. Can those payments be clawed back?

Often, yes, and this is where estates and bankruptcy intersect most painfully. Relatives of an individual debtor and officers, directors and controlling owners of a corporate debtor are "insiders" under 11 U.S.C. § 101(31). That status matters in three ways.

• Preferences: Under 11 U.S.C. § 547(b)(4)(B), payments to an insider on account of an existing debt can be recovered if made within one year before filing, not the 90 days that applies to everyone else. Repaying the founder's loan to the company six months before the company files is a textbook preference.
• Federal fraudulent transfers: Section 548 reaches transfers made within two years before filing for less than reasonably equivalent value while the company was insolvent, or with actual intent to hinder creditors.
• New York fraudulent transfers: Through 11 U.S.C. § 544(b), the trustee or debtor-in-possession can use New York's Uniform Voidable Transactions Act, Debtor and Creditor Law §§ 273–276, which carries a four-year lookback under DCL § 278. Transfers of company assets to a spouse or children for no consideration, or the sale of a business vehicle to a son for a nominal price, fall within this period.

If the transferee is the decedent's estate, or an heir who already received a distribution, the avoidance action is brought against them in bankruptcy court. The executor should not distribute the estate until the lookback periods have run or the claims have been resolved. For the related question of moving assets between spouses before a creditor problem, see asset protection and moving assets under one spouse.

Should the decedent's company file Chapter 7 instead, or just wind down?

Chapter 11 only makes sense if there is a business worth saving: recurring customers, a lease at below-market rent, a contract the company can perform, or a buyer willing to pay more for a going concern than for the equipment. If the company's value was the decedent's personal relationships and those died with the decedent, a reorganization will fail.

Three facts should inform the choice:

• A corporation or LLC receives no discharge in Chapter 7 (11 U.S.C. § 727(a)(1)), and no discharge under a liquidating Chapter 11 plan (§ 1141(d)(3)). Liquidation does not clean up the entity; it simply distributes what exists and leaves an empty shell.
• Chapter 7 removes the executor from the equation. A Chapter 7 trustee takes control of the company's assets, sells them, and distributes under the priority scheme of § 507. The estate, as owner, receives only a surplus, which is rare.
• A voluntary wind-down outside bankruptcy, through dissolution under Business Corporation Law Article 10 or LLC Law Article 7, is often cheaper where creditors are few and cooperative and there is no litigation to stay. The executor still needs Surrogate's Court authority to act for the entity and must follow the statutory notice-to-creditors procedures for the dissolution.

What if a sole proprietor dies in the middle of his own Chapter 11 case?

Fed. R. Bankr. P. 1016 answers this. In a Chapter 7 case, the debtor's death does not stop the case; the trustee finishes liquidating. In a Chapter 11, 12 or 13 case, the court decides whether further administration is possible and in the best interest of the parties. If it is, the case proceeds as though the death had not occurred, and the executor steps into the debtor's shoes. If it is not, the case is dismissed and the creditors go back to Surrogate's Court to present claims against the estate. The executor should notify bankruptcy counsel immediately after the death and should not take any action in the business until the bankruptcy court has addressed substitution.

How we can help

We advise executors, administrators, heirs and owners of closely held New York businesses at the point where estate administration and insolvency meet. That includes evaluating whether a decedent's company should file Subchapter V or Chapter 7 or wind down; obtaining SCPA § 2108 authority to continue a business; handling guarantee claims and insider avoidance exposure on the estate side; filing and defending proofs of claim; and coordinating the Surrogate's Court and bankruptcy court timelines so that the estate can close without leaving the executor exposed. We represent clients in the Southern and Eastern Districts of New York and in the Surrogate's Courts of New York City, Long Island and Westchester.

To discuss a business insolvency affecting a New York estate, call 212-233-1233 or email [email protected].

About the author

Albert Goodwin is a New York attorney whose practice centers on estate administration, probate litigation and the financial problems that surface when someone dies: insolvent estates, fiduciary disputes and the treatment of business interests in an estate. Read more about Albert Goodwin.

Last reviewed: 2025. Dollar thresholds cited on this page (the Subchapter V debt limit, filing fees and quarterly U.S. Trustee fees) are adjusted periodically by statute and should be confirmed against the current figures before relying on them.

This page provides general information about New York and federal law and is not legal advice. Reading it does not create an attorney-client relationship. The right course of action depends on the facts of your estate and your business, and you should consult a lawyer before filing a petition, paying or rejecting a claim, or continuing a decedent's business.

Related pages

• Bankruptcy overview: consumer and business cases
• Estate administration in New York
• Letters of administration
• Fiduciary accountings
• Breach of fiduciary duty
• Estate planning for executives and business owners