Running a small business is hard work. A lot of opportunities simply don’t pan out, and businesses can quickly sink into debt. But all hope is not lost, as filing for a Chapter 13 bankruptcy can give you some breathing room to restructure and reduce your debt.
In the following guide, we’ll tell you everything you need to know about a business bankruptcy Chapter 13 filing and help you figure out whether this is the way back to profitability for your business.
Businesses aren’t eligible for Chapter 13 bankruptcy, but business owners are. As such, a
Chapter 13 business bankruptcy enables owners to re-organize their debts in order to salvage their independently-owned businesses. It doesn't involve any liquidation of assets. Instead, you agree on a repayment schedule with your creditors.
These payments are made on a monthly basis to the bankruptcy Chapter 13 trustee the court assigns to your case, who then pays the creditors. The entire process can last anywhere between three to five years. A portion of your debt may also be written off to make your payments easier.
The amount you pay back depends on your finances, including your income, expenses, and even the type of debt. However, there are some types of debts that you must pay in full, regardless of your financial status. These are referred to as priority debts, and examples include taxes, alimony payments, and other domestic support payments.
An important part of a Chapter 13 filing is your ability to prove that your income is insufficient to meet your debt obligations.
Seeing as you cannot file for Chapter 13 bankruptcy under your business name, you’ll need to do it under your name. This is an ideal solution for sole proprietors who aren’t a separate legal entity from their business, as is the case with corporations and LLCs.
A sole proprietor is responsible for debts incurred as an individual and a business. This means that all of your personal income and property are available to clear off business debts. Also, creditors are more likely to get their money through this arrangement.
Here are some of the benefits your small business gets from a Chapter 13 filing.
Your business assets are crucial to keep operations running. Losing them to creditors to settle debts can be detrimental to your business. Thankfully, Chapter 13 bankruptcy lets you keep both exempt and nonexempt assets from being seized.
Exempt assets are those you need to operate your business. Different businesses have different property and equipment needs, and when filing for Chapter 13, you’ll need to prove that certain assets are critical for maintaining operations.
You can also keep nonexempt business property when filing Chapter 13. But you’ll need to account for their value in your repayment plan. Each state has bankruptcy exemption statutes that let you know what assets can be protected.
This only works if you’re a sole proprietor, as there is no separation between individual and business debts. You can list business debts in your bankruptcy filing and most likely have to pay small installments on these debts. Once you complete your payment plan, a qualifying balance will be discharged or written off.
Chapter 13 enables you to cover priority debts as part of your repayment plan. These include taxes or loans that you are personally liable for.
Filing for Chapter 13 is a perfectly reasonable solution for those trying to save a struggling business and keep their assets from being sold off. And while businesses aren’t eligible for Chapter 13, business owners can file for this type of bankruptcy to restructure their debt and save their business in the process. Before you file, it’s strongly recommended that you contact a Chapter 13 lawyer to discuss your options.
Anyone is eligible for Chapter 13 so long as their unsecured debts are less than $394,725 and secured debts are less than $1,184,200.
You don’t have to lose any property because Chapter 13 does not involve the liquidation of assets to repay debts. That said, nonexempt property will be seized if you cannot cover it in your repayment plan.
The main difference between the two is that any person or business can file for Chapter 11, while Chapter 13 is reserved for individuals only. Another difference is that Chapter 11 has no specific debt-level limits or required income, while Chapter 13 requires specific debt limits.
A Chapter 13 bankruptcy can impact your credit score negatively. It can stay on your credit report for up to seven years. Bankruptcy also makes it difficult to secure mortgages and other loans.
Julia A. is a writer at SmallBizGenius.net. With experience in both finance and marketing industries, she enjoys staying up to date with the current economic affairs and writing opinion pieces on the state of small businesses in America. As an avid reader, she spends most of her time poring over history books, fantasy novels, and old classics. Tech, finance, and marketing are her passions, and she’s a frequent contributor at various small business blogs.
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