How to File Chapter 13 Bankruptcy for a Small Business
Personal and Small Business Debt Adjustment
You've probably heard of Chapter 7 and Chapter 11 bankruptcy for businesses. But if you are a small business, you may have another option. Sole proprietor businesses that file business tax returns with their personal returns have another option that may work better for you: Chapter 13.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is available for individuals and self-employed business owners.
It's called a called a "debt adjustment" bankruptcy. In Chapter 13, a payment plan is set up for the debtor over three to five years, and it includes an automatic stay, prohibiting creditors from collecting during that time. Chapter 13 also prevents foreclosure during the repayment period.
Who May File Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy is available to individuals who have a regular income and "as long as the individual's unsecured debts are less than $336,900 and secured debts are less than $1,010,650" 11 U.S.C. § 109(e). (These amounts are adjusted periodically for inflation.) In the case of married individuals, one or both spouses may file the petition.
Chapter 13 bankruptcy is available to self-employed individuals and those with unincorporated businesses. Partnerships and corporations are not eligible to file Chapter 13 bankruptcy, although they may file Chapter 7 Liquidation or Chapter 11 Reorganization.
How Does the Chapter 13 Bankruptcy Process Work?
Under Chapter 13 bankruptcy, the debtor files a plan to repay all or part of his/her debts, over a three to five year period.
The length of time is determined by the monthly income of the debtor. During this time, creditors may not start or continue collection efforts against the debtor.
To initiate the process, the petitioner must file with the court:[br}
- A list of all creditors and the amounts and nature of their claims;
- The source, amount, and frequency of the debtor's income;
- A list of all of the debtor's property; and
- A detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
A business cannot file Chapter 13 bankruptcy under a business name. If you have a sole proprietorship, you may be able to file Chapter 13 bankruptcy, since your business income is included in your individual income tax return.
When to Consider Filing Chapter 13 Bankruptcy
You might consider Chapter 13 bankruptcy if:
- You own a sole proprietorship which has value and you don't want to liquidate it in a Chapter 7 bankruptcy
- You have enough income, from self-employment and other sources, to provide for your basic living expenses and also make the court-required payments on your debts
- Your unsecured debts are less than $336,900 and your secured debts are less than $1,010,650.
- You filed Chapter 7 bankruptcy within the last six years (if this is the case, you must file Chapter 13 bankruptcy).
Disclaimer: This article, and the information on this site, is intended for general information only. The author is not a CPA, tax attorney, or Enrolled Agent. Consult with your tax professional for information relating to your specific situation.