Chapter 13 bankruptcy is the only type of reorganization bankruptcy that’s appropriate for most small business owners. (The other reorganization bankruptcies are Chapter 11 and Chapter 12). 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, most remaining debts are discharged when the plan ends.
Only individuals can file for Chapter 13. You can use Chapter 13 to rid yourself of business debts for which you have personal liability (for example, if you are a sole proprietor or you have taken on personal liability for some corporate or LLC debts), but a corporation, an LLC, or a partnership cannot file for Chapter 13 as an entity. Also, Chapter 13 bankruptcy is available only to those who have unsecured debt of up to $383,175 and secured debts of up to $1,149,525; 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, including:
- cash advances for more than $925 taken within 70 days before filing for bankruptcy
- recent debts for luxuries
- loans owed to a pension plan or 401(k)
- marital debts (other than for spousal support) created in a divorce or settlement agreement
- debts taken out to pay a nondischargeable tax debt, and
- court fees.
Excerpted from Bankruptcy for Small Business Owners: How to File for Chapter 7, by Attorney Stephen Elias and Bethany K. Laurence, J.D.