Business Bankruptcy 101: Understanding Chapter 13 Bankruptcy

Traditionally, Chapter 13 bankruptcy is for individuals. Most businesses will not be able to file Chapter 13. Instead, they will use either Chapter 7 for a liquidation or Chapter 11, which is specifically targeted toward businesses. However, there are situations where small businesses may still qualify to use Chapter 13.

When Can a Small Business Use Chapter 13 Bankruptcy?

It makes more sense for some small businesses who do not want to liquidate to use Chapter 13 instead of Chapter 11 because Chapter 11 is built with huge companies in mind. Nonetheless, only businesses that are owned by a sole proprietor can use Chapter 13 bankruptcy because it is specially designed for individuals.

When you file for bankruptcy as a sole proprietor, you are not filing as the business—you are filing as yourself. This is because although you may have different bank accounts, as a sole proprietor, you and your business are really one in the same from a legal perspective. That also means that even if you consider some assets your personal assets and some business assets, every asset you own will be included in your bankruptcy estate, unless it is exempt under state or federal law.

Because there is no distinction between your business and your personal finances, that also means that the business debts are really your personal debts as well, and vice versa.

What Does Chapter 13 Bankruptcy Look Like?

In Chapter 13, you essentially create a large repayment plan that involves all of your creditors. You can create this plan yourself, but it must meet specific requirements based on the Bankruptcy Code. For example, you must commit to providing all of your disposable income to the plan for at least the next three years (or until your debts are paid in full, whichever is sooner) from the date that you begin plan payments.

The overall amount that you must pay back will depend on a variety of factors, including:

• Your income
• The amount of debt you have
• The relation of debt to income
• The types of debt that you have

Generally, the higher your income, the more you will have to repay. However, certain debts must be paid in full regardless of your income, such as child support obligations and certain tax debts. These debts will also have a significant impact on the amount of your plan payments as well.

One of the major benefits of filing for Chapter 13, especially as a small business, is that you can keep most, if not all, of your assets. You simply have to include ongoing payments for those assets as part of your plan.

What If I Cannot Repay Everything?

The maximum amount of time that you have to commit to a Chapter 13 plan is five years. If you have dischargeable debts after that time, then the remaining amounts will be forgiven after you complete your plan.

If your small business is struggling, and you are considering bankruptcy, talk to the experienced professionals at Maxwell Dunn. We can help you determine which type of bankruptcy will fit your unique needs.