Chapter 13 Bankruptcy for Small Businesses Explained

 

Chapter 13 Bankruptcy for Small Businesses Explained

Filing for bankruptcy can be a scary thing for any small business owner. But sometimes, it’s the only option to get out from under a mountain of debt and get your business back on track. Chapter 13 bankruptcy allows small business owners to reorganize their debts and make a plan to repay creditors over time. Here’s what every small business owner needs to know about Chapter 13 bankruptcy.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy allows you to keep your assets, like your home or car, while repaying some or all of your debt over 3-5 years. This type of bankruptcy is only for individuals – not corporations or partnerships. But there are some workarounds that let sole proprietors and single-member LLCs use Chapter 13 to reorganize business debts. I’ll get into those later.

First, let’s look at how Chapter 13 bankruptcy works:

• You file a petition with the bankruptcy court in your district and provide financial information like income, expenses, assets, and debts.
• The court approves a repayment plan where you make monthly payments to a trustee. The trustee distributes payments to your creditors.
• The repayment plan lasts 3-5 years. At the end, any remaining unsecured debt is discharged.
• While in Chapter 13, you keep all your assets like your home or car unless you choose to surrender them.
• The court can approve cramdowns of secured debts like car loans or mortgages to lower payments.
• All your disposable income goes towards plan payments for 3-5 years.

The goal of Chapter 13 is to catch up on missed payments and get back on track with a more manageable repayment plan. It stops collections and foreclosures while you get your finances in order.

Chapter 13 Eligibility

To file Chapter 13 bankruptcy as an individual, you must:

• Have regular income – this includes self-employment income
• Have less than $419,275 in unsecured debts (like credit cards or medical bills)
• Have less than $1,257,850 in secured debts (like mortgages or auto loans)

You also have to show you can make your proposed plan payments. The court looks at your monthly income and expenses to decide if the plan is feasible. They want to see your income is stable enough to handle the 3-5 year commitment.

Can a Small Business File Chapter 13?

Unfortunately, only individuals can file Chapter 13 bankruptcy – not corporations, LLCs, or partnerships. But there are a couple workarounds for small business owners:

Sole Proprietors

If you’re a sole proprietor with no separate business entity, you can file a personal Chapter 13 bankruptcy and include your business debts. The bankruptcy covers both personal and business debts.

This lets sole proprietors reorganize business debts and save the company. You propose repaying all or some of the business debts through the 3-5 year repayment plan.

Single Member LLCs

If your business is a single member LLC, you can file personal bankruptcy and include the LLC’s debts. This essentially treats the LLC as a sole proprietorship in bankruptcy.

Again, this allows reorganizing business debts to potentially save the company.

Partnerships and Corporations

Partnerships and corporations can’t file Chapter 13 bankruptcy. They can use Chapter 11 bankruptcy to reorganize debts. But there are more requirements and it’s much more complex.

If you’re part of a partnership or corporation facing bankruptcy, it’s best to talk to a business bankruptcy lawyer. They can advise on the best options for your situation.

The Chapter 13 Process

Filing Chapter 13 bankruptcy involves several steps:

1. Submit petition and forms – This includes financial info, proposed repayment plan, income and expenses.
2. Automatic stay – This immediately stops collections, wage garnishment, foreclosures, and repossessions.
3. 341 meeting – You meet with the trustee and creditors to review your finances and repayment plan.
4. Confirmation hearing – The judge reviews and confirms your repayment plan.
5. Make plan payments – You make monthly payments to the trustee who distributes them to creditors.
6. Discharge – After completing all payments over 3-5 years, remaining unsecured debts are discharged.

This gives you time to catch up on payments on assets like your home or car. Meanwhile, collections stop and you get a fresh start after completing the repayment plan.

Chapter 13 Repayment Plan

The core of Chapter 13 bankruptcy is the debt repayment plan. This lays out how much you’ll pay each month and how payments get distributed to creditors.

Your repayment plan must pay unsecured creditors as much as they’d receive in Chapter 7 bankruptcy. For secured debts, you have a few options:

• Keep making regular payments – You can continue making normal monthly payments on secured debts.
• Cure defaults – Make a lump sum payment to become current on missed payments.
• Cramdown – Ask the court to lower monthly payments, interest rates, or balance owed.
• Surrender – Return the secured asset to satisfy the debt.

Cramdowns involve filing a motion asking the judge to modify mortgage, car loans, or other secured debts. This can significantly lower payments. But creditors can object if they’re not receiving fair value.

Your attorney can help negotiate with creditors to get a repayment plan approved. The goal is to maximize how much you can afford to pay back.

Benefits of Chapter 13 for Small Businesses

There are many advantages to Chapter 13 bankruptcy for small business owners:

• Keep assets – You can keep assets like commercial real estate used in business.
• Lower debt payments – Cramdowns can reduce secured debt payments like commercial mortgages.
• Catch up on payments – Cure defaults on things like equipment financing.
• Stop collections – Creditors must stop collection calls and lawsuits during bankruptcy.
• Manageable plan – More affordable payments through 3-5 year repayment plan.
• Discharge debt – Eliminate remaining unsecured debts like credit cards or vendors.

Chapter 13 bankruptcy stops aggressive creditors and gives you time to catch up. This can help struggling small businesses get back on their feet.

Risks of Chapter 13 for Small Businesses

While Chapter 13 offers many benefits, business owners should also weigh some potential downsides:

• Complex process requiring an attorney
• Upfront attorney fees and filing costs
• Ongoing trustee fees based on repayment plan payments
• Possibility of plan not being approved by court
• Required repayment of disposable income for 3-5 years
• Potential for creditors to object to cramdown proposals
• Missed payments can lead to case being dismissed
• Ongoing court supervision during repayment plan

It’s not an easy process, and a failed Chapter 13 case can make your situation worse. Be realistic about what you can afford for monthly payments over several years.

Alternatives to Chapter 13 Bankruptcy

Before deciding on Chapter 13, explore alternatives like:

• Debt consolidation loan – Combine debts into one lower payment
• Debt management plan – Work with credit counseling agency to negotiate lower payments
• Out-of-court settlements – Work directly with creditors to modify debt terms
• Sell assets – Sell unused equipment or other assets to pay off debts
• Chapter 11 bankruptcy – Reorganization option for LLCs, partnerships and corporations

The right option depends on your specific situation. I recommend talking to both a bankruptcy attorney and a small business debt relief expert before deciding.

Finding the Right Bankruptcy Attorney

Navigating the Chapter 13 process for a small business is complex. An experienced bankruptcy attorney is essential.

Look for a lawyer who specializes in Chapter 13 filings for small businesses. They’ll understand all the nuances. Expect to pay $3,000 – $5,000 in attorney fees.

Interview a few attorneys before deciding. Look for someone who listens and understands your business goals. Make sure they have a good plan for getting your Chapter 13 repayment plan approved.

A good lawyer can make the difference between success and failure in Chapter 13 bankruptcy. Take time to find the right one.

Chapter 13 Bankruptcy Timeline

A Chapter 13 bankruptcy case typically follows this timeline:

• Month 1 – Submit petition and forms, automatic stay begins
• Month 1-2 – 341 meeting with trustee
• Month 2-3 – Confirmation hearing for repayment plan
• Month 3 – Start making monthly plan payments
• Month 60 – Final plan payment, discharge of debts

It takes 1-3 months to get the repayment plan approved. Then you make payments over 3-5 years until all conditions are satisfied.

The automatic stay halts collections right away. So you get immediate relief while going through the court approval process.

Getting Help from a Small Business Bankruptcy Lawyer

Considering bankruptcy for your small business is tough. The financial stress feels overwhelming.

But Chapter 13 bankruptcy can be an opportunity to fix mistakes and get a fresh start. With an affordable repayment plan in place, you can rebuild your business.

I know it’s a lot to digest. Please feel free to reach out if you have any other questions about Chapter 13 bankruptcy. I’m always happy to offer free advice for small business owners in need.

Here are some helpful bankruptcy resources:

• SBA Guide to Business Bankruptcy
• Nolo: Chapter 13 Bankruptcy for Small Businesses
• Department of Justice Bankruptcy Resources