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Saving Your Business Through Chapter 13

Chapter 13 isn’t just for wage earners. If you have a small business operating as a sole proprietorship, a Chapter 13 case could significantly relieve you of pressure from your business and personal debts while you continued to operate your business.

Who Can File Chapter 13

Chapter 13 can be filed by an individual or a couple “with regular income,” no matter the source of that income. The income just needs to be “sufficiently stable and regular to enable [the] individual to make payments under a plan under chapter 13 . . . .” (See Section 101(30) of the Bankruptcy Code.)

There are also debt limits for filing under Chapter 13. The individual or couple must have less than $360,475 in unsecured debt and also less than $1,081,400 in secured debt. (These amounts are effective through March 31, 2013, after which they are expected to increase slightly.)

Effect of Business Entity

A corporation cannot by itself file a Chapter 13 case, nor can a business partnership. Only an individual, or an individual and spouse, can.

Also, if you own a small business in the form of a corporation, limited liability company, or formal partnership, that business entity will usually be considered a legal entity separate from yourself, with its own debts and assets. Therefore, your bankruptcy filing would not directly protect the business entity.

But if you operate your business as a sole proprietorship—in your own name, or through an assumed business name—then you and business are treated as a single legal entity. The business’ assets are simply treated as part of your personal assets; its debts are just part of your debts. Then your bankruptcy filing will protect the business’ assets as your assets, and will impact its debts as your debts.

Chapter 13 Helps Your Sole Proprietorship Business by:

  1. Dealing with your business and individual financial issues together. Since you are personally liable for all debts of your business, just like your individual debts, you can take care of both your individual and business debts through one Chapter 13 case.

  2. Stopping both business and personal creditors from chasing and hurting you and your business. The “automatic stay” that comes with the filing of your Chapter 13 case, stops ALL your creditors’ actions collecting against you or your assets, or against your business and its assets.

  3. Preventing the seizure of your business assets so that it can keep operating. If you would not file a bankruptcy, your business or personal creditors could get a judgment against you, and then seek to seize your business assets. Bankruptcy prevents that.

  4. Allowing you to operate your business, in contrast to Chapter 7 which would likely result in closure and liquidation of your business. If you filed a Chapter 7 “straight bankruptcy,” usually you could not continue to operate your business. It is designed to liquidate your business. Chapter 13 is instead designed to allow you to keep running the business, and to keep the assets needed to do so.

  5. Keeping essential business and personal collateral. If you are behind in payments on debts secured by either business or personal collateral, Chapter 13 will first temporarily stop repossession of the collateral. Then often you will get you an opportunity to lower the payments and/or be given time to catch up on back payments. With some special secured debts—certain judgment liens and second mortgages—the liens can be “avoided”—gotten rid of altogether. Chapter 13 gives you ways to keep collateral that you would otherwise lose, and often under better payment terms.

  6. Resolving both business and personal tax debts. Chapter 13 is well-designed to deal with both business and person taxes, all in one package. It protects you while giving you time to pay the taxes you need to pay, with the most flexible terms possible, while legally writing off (discharging) those that can be.

Chapter 13 can be a very effective tool for saving your business. It does have some disadvantages relating to ongoing businesses. For example, 1) its rules are not very flexible because they were primarily designed for consumers not businesses, 2) the cases usually take three to five years to complete, and 3) you generally can’t use credit during that time. Be sure to talk to an attorney who is highly experienced in bankruptcy and in business bankruptcy in particular, one who will take the time to understand your situation and advise you about all your alternatives, including Chapter 13.