As in most of the world, there is a BIG difference between a person running a business and a person owning a company which runs a business.
In the first case, the person is liable for all the debts of the business, in the second case, providing they have fulfilled the legal duties as am owner/director (as applicable) they are not liable for the debts of the company. One of those legal duties is to stop racking up debts you can't pay.
In either case, your friend needs professional advice (legal and/or accounting) NOW!
A person who is insolvent (cannot pay their debts as and when they fall due) can seek protection from their creditors through bankruptcy. German bankruptcy law, by most standards, is brutal but not so brutal as to take away parenting rights or put the person in jail.