Chapter 13 Bankruptcy for a Small Business Owner (Sole Proprietor Only)

Here's how Chapter 13 bankruptcy works if you own a business as a sole proprietor.

Although Chapter 13 bankruptcy is preferable to the more expensive Chapter 11 bankruptcy, it's only available to small business owners who are sole proprietors. In Chapter 13, you use your income to fund a repayment plan that lasts from three to five years. If you make all of the payments required by the plan, qualifying debts are discharged when the plan ends.

A sole proprietor can use Chapter 13 to get rid of business debt but you must include your personal finances (including debts and assets), as well. A Chapter 13 bankruptcy is available only to those who have unsecured debt of up to $394,725 and secured debts of up to $1,184,200; those with higher debt totals can’t use Chapter 13.

How Chapter 13 Works

In a Chapter 13 bankruptcy, you don’t necessarily lose any property. Instead, you use a portion of your future income to pay some or all of what you owe your creditors over time. The length of your repayment plan will depend on your income. If your average monthly income in the six months before you file for bankruptcy is less than or equal to the median income for your state, your repayment plan need not last more than three years. But if your income is more than the state median, your plan must last long enough to repay all of your debt, or five years, whichever is shorter. (For more on the means test, see The Means Test and Other Eligibility Issues.)

Your repayment plan must devote all of your anticipated disposable income to repaying your debts over the repayment plan period. In Chapter 13 bankruptcy, you must pay some debts in full (back taxes, child support, and short-term secured loans are the most common examples). For your other debts, the rule is that your unsecured creditors must receive at least as much as they would have gotten if you had filed for Chapter 7 bankruptcy. That is, you will have to pay out an amount equal to the value of your nonexempt property (the property that the trustee could have taken and sold in a Chapter 7 bankruptcy). If you have a lot of nonexempt assets, you’ll have to pay more toward your debts during your Chapter 13 repayment plan, unless you voluntarily sell the assets and make the proceeds available to the trustee.

If you successfully complete the repayment plan, most categories of remaining debt are wiped out. The same categories of debt that are discharged in Chapter 7 are also discharged in Chapter 13. And, some debts that aren’t dischargeable in Chapter 7 bankruptcy can be discharged in Chapter 13, such as marital debts (other than for spousal support) created in a divorce or settlement agreement and resulting from a division of property.

Excerpted from Bankruptcy for Small Business Owners: How to File for Chapter 7, by Attorney Stephen Elias and Bethany K. Laurence, J.D.

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