If you’re a sole-proprietor or small business owner struggling to stay afloat financially, bankruptcy may help resolve your money problems. For debtors wishing to file bankruptcy but not liquidate their business, there are currently two types of bankruptcy available—Chapter 11 and Chapter 13.
Overview
In many ways Chapter 11 and Chapter 13 bankruptcy are very similar. They both provide the following:
- A way to restructure your finances while keeping equipment/property you need to run your business. For example, if you own a second vehicle that’s specifically used for business purposes, both Chapter 11 and Chapter 13 bankruptcy would help you keep that vehicle.
- Time to liquidate assets that you can no longer afford. For example, filing a business bankruptcy would allow you to sell equipment, vehicles, and other property, and use the proceeds to repay creditors (in accordance with your bankruptcy repayment plan).
- Modify repayment terms for secured debts such as a mortgage or equipment loan. This can be particularly helpful if your business’ monthly operating costs are unaffordable.
- Discharge unsecured debt that you can’t repay over the course of your business bankruptcy repayment plan.
Who Can File Chapter 11 Bankruptcy?
In general, anyone can file Chapter 11 bankruptcy. However, because it is expensive and complex, only individuals and businesses that have a large amount of debt and very complex finances consider filing Chapter 11 bankruptcy.
Who Can File Chapter 13 Bankruptcy?
Unlike Chapter 11 bankruptcy, Chapter 13 bankruptcy has limitations on who can file.
Debt Limits
If you have over a certain amount of debt, you may be prohibited from filing Chapter 13 bankruptcy—this is what’s called a debt limit. As of 2015, the Chapter 13 bankruptcy debt limit is $383,175 for unsecured debts and $1,149,525 for secured debts. This debt limit adjusts periodically, so check with your attorney to find out if your debts exceed it.
Business Structure
Chapter 13 bankruptcy is only available to individuals. If you’re a sole-proprietor, you’re allowed to file Chapter 13 bankruptcy as long as you don’t exceed the debt limits. However, if you are structured as a corporation, partnership, LLC, or other entity, you are prohibited from filing Chapter 13 bankruptcy.
Plan Length
In Chapter 13 bankruptcy, debtors must complete their plan in three to five years. However, Chapter 11 has no limit on the length of time that a filer can propose to make plan payments.
Disposable Income
In Chapter 13 bankruptcy, debtors are required to use all of their disposable income to repay their creditors. However, Chapter 11 bankruptcy has no such requirement.
“When considering a business bankruptcy, speak with your bankruptcy attorney to determine which bankruptcy chapter is best for you.”
