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How Can Chapter 13 Bankruptcy Help You Save Your Business

If you have a struggling but promising small business, Chapter 13 case could enable you to keep operating it while being protected from your creditors.

Can You File a Chapter 13 Case?

You don't have to be a "wage earner" to file a Chapter 13 case. You just need to have "regular income," no matter the source of that income. Your income is "regular" if it is "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.) (If that sounds like a circular definition, it is! Your income qualifies as being sufficiently consistent if it is consistent enough to make consistent plan payments! Congress must have wrote that.)

There are also debt limits for filing under Chapter 13. You, or you and your spouse, have to have less than $360,475 in unsecured debt (debts with no collateral) and also less than $1,081,400 in secured debt (debts with collateral) to file a case. These amounts are effective through March 31, 2013, presumably increasing slightly right after.

The Legal Form of Your Business Entity Matters?

A corporation itself cannot file a Chapter 13 case. A limited liability company or business partnership can't either. Only an individual can, or an individual and spouse.

However, if your business is a sole proprietorship-operated 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 merely part of your personal assets; its debts are merely part of your debts. In this situation, your personal bankruptcy filing will protect your assets including your business' assets, and all your debts are included including business-related ones.

Note also that if instead you own your 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 or its assets.

Chapter 13 Helps Your Sole Proprietorship Business:

1) By addressing and solving your business and individual financial problems in one package. Since you are personally liable for all debts of your business, you can take care of both your individual and business debts through a single Chapter 13 case.

2) By stopping both business and personal creditors from chasing and hurting you and your business. The "automatic stay" accompanying your Chapter 13 case stops your creditors' efforts at collecting against you, your business, and against your personal and business assets.

3) By avoiding having your business assets being taken from you so that you can keep operating the business. Sooner or later, if you didn't file a bankruptcy, your business or personal creditors would get a judgment against you, and then try to seize your business assets.  Bankruptcy prevents them from getting the judgment or, if too late for that, from seizing assets.

4) By enabling you to operate your business, in contrast to Chapter 7 which would likely result in closure and liquidation of your business. A Chapter 7 "straight bankruptcy" case usually would not let you to continue operating your business. Chapter 7 is designed to terminate and liquidate your business. Chapter 13 is instead designed to let you keep operating the business, and to retain the assets needed to do so.

5) By keeping essential business collateral. If you are behind in payments on debts secured by your business' collateral, Chapter 13 will stop repossession of the collateral. Then it will often enable you to lower the payments and/or be given time to catch up on the back payments. Also, with some special secured debts-certain judgment liens and second mortgages-the liens can be "avoided"-gotten rid of altogether.

6) By resolving both your business and personal tax debts. Chapter 13 can deal simultaneously with both business and personal taxes. It keeps protecting you while giving you time to pay the taxes you need to pay, under very flexible terms, while discharging  those taxes that can be discharged.

For all these reasons, Chapter 13 is often an effective way to save your business. Get advice about this from an attorney who is highly experienced in bankruptcy in general and in business bankruptcy in particular, so that you are well-informed about all your legal options, including Chapter 13.

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