If debts become unmanageable, small business owners can file for Chapter 7 or Chapter 13 bankruptcy. However, which chapter is right depends on the structure of the business, how much debt and assets you have, and whether you intend to continue the business. Let’s discuss the pros and cons of Chapter 7 and Chapter 13 bankruptcies for small businesses.
Who Can File For Chapter 7 Bankruptcy?
Both individuals and business entities can file for Chapter 7 bankruptcy. Small business owners can file Chapter 7 on behalf of their business or for themselves personally (sole proprietors must file a personal bankruptcy to wipe out business debts because you and your business are considered the same legal entity). However, many business owners file both because the business bankruptcy does not wipe out personal liability for business debts.
Pros of Chapter 7 Bankruptcy for Small Business Owners
Chapter 7 allows sole proprietors to wipe out both personal and business debts by filing a single personal bankruptcy. In addition, you can use exemptions to protect business assets. This allows you to continue operating the business after wiping out its debts in bankruptcy.
If your business is a partnership, corporation, or limited liability company (LLC), Chapter 7 bankruptcy provides a simple way to close down and liquidate the business. When you file a Chapter 7 on behalf of your business, it becomes the bankruptcy trustee’s responsibility to sell off the assets of the business and pay its creditors. This leaves you free to do other things, including seeking employment.
Cons of Chapter 7 Bankruptcy For Small Businesses
Unless you are a sole proprietor filing a personal bankruptcy, your business does not receive a discharge of its debts in Chapter 7 . Also, you cannot use exemptions to protect assets in a business bankruptcy. As a result, all assets of the business are sold to pay its creditors and the business is closed down.
You are still personally liable for any company obligations unless you file a personal Chapter 7 bankruptcy. As a result, it is best to file a business Chapter 7 if you wish to close up shop, the business has little or no assets, and you are not personally liable for company debts.
Who Can File for Chapter 13 Bankruptcy?
Only individuals are allowed to file for Chapter 13 bankruptcy. Business entities such as partnerships, corporations, or LLCs cannot file. However, similar to Chapter 7, sole proprietors can file a personal Chapter 13 to wipe out your personal and business debts.
Advantages Of Chapter 13 Bankruptcy For Small Business Owners
In a Chapter 13, you keep all your assets and pay back all or a portion of your debts through a repayment plan. If you are a sole proprietor with a lot of business assets, a Chapter 7 trustee may sell them if you don’t have enough exemptions. By filing a Chapter 13, you can protect all business assets and keep the business running while reorganizing your debts.
Even if your business is a separate entity like a partnership, corporation, or LLC, you can wipe out your personal liability for business debts with a Chapter 13. You can also do things with a Chapter 13 that you are not allowed to in a Chapter 7, including paying off priority creditors and cramming down secured loans through your plan.
Disadvantages Of Chapter 13 Bankruptcy
The biggest disadvantage to Chapter 13 is that business entities cannot file a Chapter 13. Also, Chapter 13 takes far longer than a Chapter 7 because you have to make monthly payments to a trustee for three to five years. If you have nonexempt assets, you can keep them but you must pay an amount equal to their value to unsecured creditors which can increase your plan payments significantly. Further, your discharge only wipes out your personal liability for business debts. The business itself must pay back its debts.
For a more detailed explanation of your small business bankruptcy options, let’s schedule a consultation today.
Moshier Law Office, PLLC
St. Paul, Minnesota