What Small Business Owners Need to Know About Chapter 7 and Chapter 13

What Small Business Owners Need to Know About Chapter 7 and Chapter 13

If you are a small business owner willing to file bankruptcy, you can do so either by filing Chapter 7 or Chapter 13 for bankruptcy. Do you know which one is the best option if your business debt becomes unmanageable?

Whether to go for Chapter 7 or Chapter 13 depends on the structure, debt amount and assets you own for your business. It also depends on your intention to continue running the business after completion of the bankruptcy process.

When to go for Chapter 7:

Going for Chapter 7 bankruptcy is a very convenient option for corporations and limited liability companies (LLCs) that are going out of business. You can’t use exemptions to protect assets in a Chapter 7 business bankruptcy. And so it’s advisable to go for Chapter 7 only if you want to wind up your business or your business.

However, as a small business owner, you can file for Chapter 7 as a sole proprietor. Chapter 7 allows you to wipe out both your personal and business debts by filing a personal bankruptcy. In this case, you can use exemptions to protect your business assets. As the benefit of this, you can continue running the same business after wiping out its debts.

When to go for Chapter 13:

Chapter 13 is only available to individuals.  You can’t choose this option if you are a corporation, partnership or LLC. However, if you are a sole proprietor, you can file for Chapter 13 to wipe out your personal and business debts.

In Chapter 13, you can keep your assets and pay back everything or a portion of your debt through a repayment plan. So if you are a sole proprietor with significant business assets, you can protect all your assets and keep the business running while organizing your debts, unlike Chapter 7 where your bankruptcy trustee may sell the assets if you don’t have enough exemptions.

The only drawback of Chapter 13 is the time it takes to complete the bankruptcy process compared to Chapter 7 as one has to make monthly payments to a trustee for 3 to 5 years. Also, if you have nonexempt assets, you can keep them by paying an amount equal to their value to unsecured creditors through the Chapter 13 plan.

To get more guidance on business bankruptcy, contact an experienced bankruptcy attorney Tom Orr today.