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How to Select the Best Bankruptcy Chapter to File For Your Biz


If you’re unsure if declaring bankruptcy is the right course of action for your financial situation, learn more about the two types of bankruptcy most filers choose.

How to Select the Best Bankruptcy Chapter to File For Your Biz

Most people considering declaring bankruptcy on their own do so under Chapter 7 or 13. To assist you in choosing which bankruptcy chapter would be ideal for your financial circumstances, this article will walk you through two widely filed bankruptcy chapters and the qualifying requirements.

Chapter 13 Bankruptcy for a Sole Proprietorship

Like Chapter 13 applies to individuals, sole proprietorships can ask the court to adopt a repayment plan lasting between three and five years if they have a stable, predictable source of revenue.

A crucial factor for any single owner thinking about Chapter 13 is that you must keep all of your assets, both personal and commercial.

Small business owners should also consider how bankruptcy will affect their businesses. You may find more information on small business bankruptcy strategies.

Filing Bankruptcy is a Partnership

Formal agreements between two or more persons for the administration and operation of a firm are known as partnerships. A partnership, however, denotes the affiliation of the members; it is not a distinct legal body in the strictest sense.

Partners split the profits during prosperous times. They could share responsibility for paying off debts in bankruptcy. Everything depends on how the partnership is set up.

Chapter 7 Bankruptcy Positive Impacts on Sole Proprietors

The sort of corporate entity will frequently determine whether or not your firm will profit from Chapter 7.

By eliminating personal and commercial obligations in a given bankruptcy case, Chapter 7 might provide the financial assistance you need if you operate as a lone entrepreneur.

You won’t need to fulfill the income criteria of Chapter 7 requires testing if your business obligations are more significant than your debts.

Additionally, since you can use bankruptcy exclusions to save your personal and corporate assets, you don’t lose all your possessions. Service-oriented businesses run by sole proprietors typically don’t require a lot of inventory or equipment, so they stand to gain the most from Chapter 7.

Limitations of Chapter 7 Bankruptcy for Small Businesses

Your firm won’t be exempt from its debts under Chapter 7 unless you file as a lone proprietor. Therefore, unless you file an individual Chapter 7 bankruptcy, you will still be liable if you contributed to the business debt, such as by signing a personal guarantee.

Additionally, you cannot use exemptions to shield assets in bankruptcy involving a corporate entity. The business closes when the trustee sells all company assets to satisfy creditors.

Who Can File for Chapter 13 Bankruptcy?

Only sole proprietors are eligible for Chapter 13 bankruptcy. Corporations, partnerships, and LLCs are not eligible for Chapter 13 bankruptcy. But single owners can file for Chapter 13 bankruptcy and restructure their personal and business-related obligations.

If you operate a business, it may also be worthwhile to explore Chapter 13 if freeing up cash via reorganizing personal debt would be sufficient to maintain the enterprise. You can choose the best overall plan with the assistance of a bankruptcy lawyer with business-related skills.

Positive Impacts of Chapter 13 Bankruptcy for Small Company Owners

A three- to five-year repayment plan is used in Chapter 13 to pay off all or a portion of your obligations. With Chapter 13, you may eliminate your accountability for corporate obligations while also using its capabilities to address issues that Chapter 7 can’t, such as:

Settling financial commitments over time, including tax debt and child support payments, and “cram down” some personal loans to the property’s value.

You must, however, pay via your repayment plan the worth of “non-exempt assets” or property you cannot safeguard through bankruptcy exemptions. This might be an issue if your company is precious.

Business interests often aren’t protected by exclusions because the corporation will be an asset; however, a “wildcard” exception can offer some protection. The key is that you would have to pay the business’s worth through the plan, which may push the needed monthly payment to an absurd level.

Negative Impacts Of Chapter 13 Bankruptcy for Small Business Owners

Because you must pay a trustee regularly for three to five years, and Chapter 13 payment plans can be pricey, Chapter 13 takes far longer than Chapter 7. Additionally, a Chapter 13 discharge releases individuals from personal accountability for business debt, but the company will still be held accountable for repaying its debts.

Bottom Line

Being a limited liability corporation separates the corporation itself from those who are a part of its activities; when you liquidate an LLC files for Chapter 7 bankruptcy, the company’s assets are to pay off its obligations.

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Shirley is a passionate blogger. She writes about her life experiences in the form of words. She had done masters in technology & working with a leading technology organization as an analyst. Moreover, if you want to follow her, then subscribe to the feeds.


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