Understanding Chapter 13 Bankruptcy for Small Businesses

Is your small business swamped with bills you can’t keep up with? Even though your company is making money, catching up on debt seems impossible. If this is the case, you’re not alone—many businesses are in the same boat.

My name is AJ, and I recently sold my business for multiple seven figures. Now, I aim to help other entrepreneurs find success and navigate the business world.

What should you know about Chapter 13 bankruptcy? Keep reading to find out!

### Key Takeaways

#### What is a Small Business Bankruptcy Chapter 13 Filing?

Chapter 13 bankruptcies help companies reorganize their debts to avoid going out of business. This type of bankruptcy lets businesses keep their assets while working to pay off all or some of their debts. Typically, you must create and get approval for a repayment plan that spans three to five years.

However, filing for Chapter 13 only works in some situations. The bankruptcy court assigns a trustee to your case. When your business makes monthly payments, the money goes to the trustee, who then distributes it to your secured and unsecured creditors according to the plan. The amount your business needs to pay back depends on its income. Some debts, known as priority debts, must be repaid in full no matter what.

#### How Chapter 13 Works for Different Business Entities

##### Sole Proprietorship

A sole proprietorship is owned and operated by one person. Filing for Chapter 13 as a sole proprietor can help you manage both personal and business debts since sole proprietors aren’t separate from their businesses legally. Your property and income are used to repay your business’s debt.

###### Advantages:
– Ability to keep business running while repaying debts
– Personal and business debts are reorganized together

###### Disadvantages:
– All personal assets are at risk

##### Partnerships

Partnerships involve two or more owners. Filing for Chapter 13 in a partnership works similarly to a sole proprietorship. A repayment plan is created for both secured and unsecured debts, but it can be tricky since personal debts of all partners are involved.

###### Pros:
– Potential to keep the business operational while repaying debts

###### Cons:
– Complicated by multiple owners’ personal debts
– Uneven debt responsibility based on partnership agreements

##### LLCs and Corporations

LLCs and corporations are separate legal entities from their owners, so Chapter 13 isn’t available. Owners with regular income can file for Chapter 13 under their own names, but not for the business itself. An alternative for these entities is Chapter 11 bankruptcy, which has no debt or income requirements.

###### Disadvantages:
– Personal liability for business debt can come into play through various means such as trust fund taxes, alter ego claims, fraud, and personal guarantees.

#### Comparing Chapter 13 and Other Bankruptcy Options

– **Chapter 11** allows businesses, regardless of size, to reorganize debts while continuing operations.
– **Chapter 7**, or “liquidation bankruptcy,” generally involves selling off business assets to pay creditors, often leading to the closure of the business.
– **Chapter 13**, or “reorganization bankruptcy,” is best for sole proprietorships and some partnerships that can pay back debts over three to five years.

#### Final Thoughts

Chapter 13 is an excellent option for sole proprietors to reorganize and repay debt while keeping their businesses running. Although it’s not available for LLCs or corporations, Chapter 13 can be very beneficial for other business structures.

Do you have more questions about Chapter 13 bankruptcy? Let us know!