If you're a small business owner with excessive debt but aren't ready to give up on your business just yet, two options might help you stay afloat. Filing for Chapter 11 or Chapter 13 bankruptcy will allow you to stay in operation and make a fresh start.
If you’re considering filing bankruptcy under Chapter 11 or Chapter 13, there are a few key differences you need to be aware of. The following information will help you clarify which course is the right one for you and your circumstances.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is exclusively available to individuals and sole proprietorships. When you file, you are asked to come up with a repayment plan that must be funded over three to five years by a regular, steady income. After that time period, if you’re up-to-date with all your debts, the rest will be erased.
This option is for small business owners with a maximum amount of $383,175 in unsecured debts and $1,149,525 in secured debts. Secured debts are loans backed by assets. In case you fall behind on your payments, a creditor has the right to seize your assets, such as your house or your car.
Unsecured loans aren’t backed by any assets. If you stop paying, the collector might sue you and start garnishing your wages, hire collectors to go after you and attempt to ruin your credit score. Both of these scenarios are scary, and for small business owners with debt, bankruptcy might be the wiser option.
Filing for Chapter 13 Bankruptcy
You’re eligible for Chapter 13 as long as you meet the above requirements and haven’t filed for Chapter 7 bankruptcy within the past four years or Chapter 13 within the past two. If you did, you wouldn’t be qualified to a discharge for your debt. After you file for Chapter 13 bankruptcy, you’ll be protected from your creditors.
A trustee will be appointed to your case, to whom you’ll provide your repayment plan along with your latest income tax return. Your creditors may object to your plan, so you, the trustee, and your attorney will work it out with them in court. Before you pay your last debts, you will be required to take a course in managing your finances.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is rarely used in small business bankruptcies because it is complicated and costly. However, if you owe more than what’s required in a Chapter 13 bankruptcy or if a limited liability company or partnership owns your business, this might be your only option. It allows you to stay in business, like Chapter 13, and restructure so that you can avoid financial problems in the future.
When you file bankruptcy under Chapter 11, you will be viewed as a small business debtor. Your debt must total no higher than $2,490,925. This number includes any debt owed to creditors and excludes money you might have borrowed from family members.
Unlike a corporate Chapter 11 bankruptcy case, there will be no committee to represent your creditors and no disclosure plan filed. You will have 300 days to create your plan of action, and your trustee will carefully watch over your case.
Filing for Chapter 11 Bankruptcy
Just like in a Chapter 13 bankruptcy, after you file, in most cases, your creditors will be told not to contact you. You’ll have to reveal your debts, assets, expenses, income, and how you manage your finances to your trustee. You must document your income and expenses in a monthly report, which will help the court determine whether or not your plan is working.
After you and your creditors agree on a repayment plan, which will include how much you’ll pay back and a time period, you will start making those payments. If you stay on track and make your payments on time, the rest of your debt will be discharged. If you don’t make your payments on time, your creditors have the right to sue you.
Which One to File?
Chapter 13 and Chapter 11 bankruptcy are designed to keep you in business. If you feel like you’re drowning in debt and still want to stay afloat, they can help you get back to a better place and figure out how to conduct business in the future. Talking to an attorney who specializes in business bankruptcy is the first step.