Understanding Chapter 13 Bankruptcy For Independent Business Owners In Need

Not all bankruptcies are created equal. There are times when it’s unquestionably time to let go of opportunities that didn’t pan out, in which case a liquidation bankruptcy — generally governed by Chapter 7 of the U.S. Bankruptcy Code — might be the best way to wind up your small business. The business’s assets are sold off, the business’s debts are paid as best as the proceeds allow, and though the debt isn’t technically discharged, there’s nothing left to collect.

The business is gone, but you get to walk away clean (unless you’ve personally guaranteed any of your business debt, but that’s an article for another time).

A Chapter 13 bankruptcy, on the other hand, doesn’t require you to sell anything. Instead, a Chapter 13 bankruptcy involves restructuring and in many cases reducing your debt, thus giving you more time to pay and an easier road back to solvency. Although business entities aren’t eligible for Chapter 13 bankruptcy, business owners are in their individual capacity

And that’s something both you and your business can take advantage of, if it makes sense for your specific circumstances. As a bankruptcy attorney, I believe it’s important to understand your options and determine if filing for Chapter 13 bankruptcy is right for you.

Nonliquidation Bankruptcy: Pay Just Enough And Keep Your Stuff

A Chapter 13 bankruptcy doesn’t require any liquidation of assets. In other words, you can keep your things — your house, typically your cars and your other property — even as you undergo a bankruptcy that reduces and ultimately may eliminate your debts.

The only complication is eligibility. In order to qualify for a Chapter 13 bankruptcy, your income needs to either be below your state’s median, or your debt-to-income ratio needs to be high enough that a court deems that you legitimately can’t meet your obligations. If you qualify, a trustee appointed by the court will take stock of your income and debts and determine a payment plan for you to partially repay your creditors (typically over three to five years).

You do, of course, have the right to be represented by a lawyer during your bankruptcy proceeding, which both I and likely every bankruptcy court in the country strongly recommend.

For small-business owners, a Chapter 13 bankruptcy can give you some breathing room in your personal finances. You’ll only need enough total income to meet your Chapter 13 plan’s payments and your living expenses. That means you might need to take less out of your business to pay yourself — perhaps none at all, if you or your spouse have other sources of income

And that can mean leaving enough in your business to keep it afloat during lean times. Declaring personal bankruptcy will also leave your business credit intact so lenders and investors are more willing to work with you.

So though you can’t use Chapter 13 bankruptcy to reduce your business debts, you can use Chapter 13 bankruptcy to help your struggling business.

Is Chapter 13 bankruptcy right for you?

Deciding to declare bankruptcy is always a weighty decision, and there are many factors to consider. Using a Chapter 13 bankruptcy to keep your independently owned business afloat is even more fraught. You’ll want to be confident that your business will pick back up to a point that it can support itself and your family again, and there are other even more complex legal and financial issues to consider.

If you’re having trouble keeping your business and your personal finances afloat, the worst thing you can do is let the situation overwhelm you and continue deteriorating. Start by gathering all of your information together to get a clear picture of your finances.

Then get the help you need. Your trusted business accountant should be your first call, and if you don’t have one, I recommend finding one. A good CPA will break down your situation for you, evaluate your options alongside you and empower you to make realistic, data-driven decisions.

If bankruptcy is looking like a serious option at that point, your next call should be to a lawyer in your area with experience in both personal and small-business bankruptcies. The two aren’t quite the same, and you’ll need competent advice on the whole picture. Your accountant and bankruptcy attorney will help you determine if bankruptcy is the best option and which type to pursue.

Bankruptcy is never ideal. But even when the situation seems most dire, you do have options, and you are in control.

The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.