Chapter 13 Bankruptcy for Business Owners: Everything You Need to Know

As a business owner, you face a number of challenges and financial concerns. It’s helpful to know that you have options when circumstances get bleak. Is Chapter 13 bankruptcy one of them?

Bankruptcy for Business Owners

Bankruptcy isn’t always as cut and dry as most people think. Not only is every situation unique, but there are multiple types of bankruptcy available within the U.S. Bankruptcy Code. The three most common are:

  • Chapter 7 Bankruptcy. This form of bankruptcy involves a liquidation plan. You agree to liquidate your assets in order to pay off as much of your debt as you possibly can. To qualify for Chapter 7, your income should fall beneath the median for the state you’re filing in. If your income is above this threshold, you must pass something known as a “means test.” While many assets will need to be liquidated, it’s possible that you can keep certain assets and belongings (including your home), if you can continue to make timely payments.
  • Chapter 11 Bankruptcy. This form of bankruptcy is known for reorganizing debt, rather than liquidating assets. In the case of a business, the business is reorganized and a plan is created to pay back creditors over a period of time.
  • Chapter 13 Bankruptcy. Chapter 13 is very similar to Chapter 11. The biggest difference is that Chapter 13 allows someone with regular income to file. This includes sole proprietors. Corporations, partnerships, and other business entities aren’t eligible for Chapter 13 and will need to use Chapter 11 relief instead.

While there’s a time and a place for each type of bankruptcy, Chapter 13 is a very useful option for those facing specific circumstances.

When Business Owners Should Use Chapter 13 Bankruptcy

With a Chapter 7 bankruptcy, you’re basically throwing in the towel and wiping out the business along with its debts. The debt doesn’t technically get discharged, but there’s nothing left for creditors to collect. This allows you to walk away clean (unless you have any personal guarantees attached to the debt.)

With Chapter 13, you don’t have to close up shop or sell anything. Debt is merely restructured. And, in many cases, it’s reduced to a more manageable amount. This allows you to pay just enough and still keep all of your assets. It’s like the best of both worlds!

The only minor complication with a Chapter 13 bankruptcy is eligibility. You need to meet specific thresholds in order to qualify. Your income either needs to be below your state’s median income level, or you’ll have to prove that your debt-to-income ratio meets a high enough threshold to legally deem you can’t satisfy your obligations.

If you qualify for Chapter 13, the court will appoint a trustee to analyze your income, evaluate your debts, and develop a customized payment plan that allows you to repay your creditors over a period of 36 to 60 months.

While you can technically represent yourself in a Chapter 13 bankruptcy, it’s not recommended. A bankruptcy attorney can ensure you file all of the right paperwork and present your case properly. There are a lot of seemingly minor mistakes you can make that can have very negative ramifications.

“I’ve seen people try to get tricky with a Chapter 13 bankruptcy and it never works out well for them,” bankruptcy attorney Rowdy G. Williams says. “For example, they try to sell assets way under value to another business they own, or they create another business in a spouse’s name and transfer assets to that business.”

The thing is, tricky maneuvers like this aren’t necessary with Chapter 13. They only serve to complicate matters and may even put your eligibility at risk. Remember, you get to keep your assets with Chapter 13. Just play by the rules and let the process unfold.

The best thing you can do is hire a competent bankruptcy attorney in your state and listen to their advice. Good lawyers have participated in hundreds of bankruptcies and know precisely what to do (and what not to do).

Adding it All Up

If you find yourself facing an insurmountable amount of debt as a sole proprietor, Chapter 13 bankruptcy often makes the most sense. Take your time, do your research, and consult with the right people.