Filing Chapter 13 Bankruptcy: Business Debts

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If you’re considering filing Chapter 13 bankruptcy for business debts, the first—and most important question—is, can you?

Type of Business Structure

There are many different types of business structures, or ways to organize a business. Two popular ones are corporations (including subchapter-S corporations) and LLCs (or “limited liability companies”) because they protect the business owner(s) from liability for business debts or obligations. If your business is a corporation or LLC, you could—if worst came to worst—walk away from the business, leaving its debts (other than any you may have personally guaranteed) behind.

Other types of business structures are not as protective—especially sole proprietorships. They don’t insulate owners from debts.

Eligibility for Chapter 13

Any individual person can file Chapter 13, including someone who is self-employed or operating a small business. The caveat is that Chapter 13 is only for “real” people, not artificial or statutorily created ones, like corporations.

However, many small businesspeople, including sole proprietors and partners, can file Chapter 13 for their business debts. They would, however, still need to meet Chapter 13’s other eligibility criteria: total unsecured debts (no property as collateral) of $360,475 or less, and total secured debts of $1,081,400 or less. Since secured debts include real estate, vehicles, and any office equipment, manufacturing machinery, or inventory which is acting as collateral for its own debt, it’s not unlikely that a small businessperson might be over this threshold. (Remember: it’s the person’s total debt that is considered—including his or her home as well as any business debts.)

Chapter 13 and Business Debts

There are certain debts that cannot be discharged (or eliminated) in Chapter 13. The main ones are debts from DUI, criminal restitution fines, alimony and child support, certain taxes, and student loans. Fortunately, except for certain taxes, these are typically not “business” debts, so this restriction should not have a significant impact if most of your debts are business related.

Secured debts—again, debts that are secured by property, including real estate and vehicles—have to be paid or else the creditor can take the property (though the balance of the debt would then be discharged). Since a lot of business debt may be secured—manufacturers may have a security interest in inventory they sold you; corporate vehicles; corporate real estate; or a loan to your business secured by your home—this restriction could be a significant sticking point. There are tools in Chapter 13 that may help the debtor reduce many of these debts (especially for investment property or anything that may depreciate), but they still need to be paid or else the debtor will lose the collateral.

However, other than the above, debts are essentially freely dischargeable in Chapter 13, which includes:

  • Credit card debt
  • Unsecured loans or lines or credit
  • Debts to vendors and suppliers 
  • Amounts owed to independent contractors

How an Attorney Can Help

Businesses have several different bankruptcy options, such as Chapter 7, Chapter 11, and Chapter 13. A lawyer can help a businessperson select the right form for his or her own unique situation.