Filing for Chapter 13 bankruptcy varies based on the type of business you run, such as:
- Sole proprietorship
- Partnership
- LLC/Corporation
Let’s see how Chapter 13 works for each of these business entities!
Sole Proprietor Files for Bankruptcy
A sole proprietorship is a business that one person owns and operates.
Being a sole proprietor and filing for Chapter 13 has many advantages.
How Chapter 13 Works for Sole Proprietors
If a sole proprietor falls behind one business’s debt payments, getting back on track by filing for bankruptcy is a viable choice.
In these cases, the sole proprietor files for Chapter 13 under their own name, NOT the business’s name.
Therefore, the individual reorganizes both their personal AND business debts.
Remember, sole proprietors aren’t separate entities like LLCs.
Therefore, the business owner is responsible for individual and business debts.
When filing for bankruptcy, the sole proprietor’s property and income are available to repay the company’s debt.
Advantages of Chapter 13 for Sole Proprietors
Some advantages of Chapter 13 bankruptcy for sole proprietors include:
- The business doesn’t have to close
- The company can keep its equipment
- The owner doesn’t (usually) have to pay other bills like energy bills, credit card statements, overdue invoices, etc.
Disadvantages of Chapter 13 for Sole Proprietors
On the other hand, some downsides of filing bankruptcy under Chapter 13 include:
- The business owner must treat business debts like personal debts
- The business may not qualify if it doesn’t have enough income
Partnership Files for Bankruptcy
Businesses that operate as partnerships are owned and operated by two or more people.
Typically, partnership business bankruptcy is stressful, but Chapter 13 is an option in some instances.
How Chapter 13 Works for Partnerships
When a small business that’s a partnership files for Chapter 13, it works similarly to a sole proprietorship.
Therefore, small business owners create a repayment plan for unsecured and secured debts.
Depending on the partnership agreement, certain owners might be responsible for repaying a larger percentage of the debts (because they own more business assets).
Another reason Chapter 13 is tricky for partnerships is because there are multiple owners’ personal debts to consider.
Advantages of Chapter 13 for Partnerships
Some pros of Chapter 13 for partnerships include:
- The business can stay open
- Owners (in some cases) don’t have to pay certain personal debts
- A partnership agreement ensures the debt relief plan is handled appropriately
Disadvantages of Chapter 13 for Partnerships
The cons of filing for Chapter 13 as a partnership include:
- It can deteriorate the working relationship between partners
- Some partners may have to pay more debt than others
- Some partners’ credit scores are negatively impacted
LLC or Corporation Files for Bankruptcy
LLCs and corporations are business entities that are entirely separate from the owner.
Therefore, when their company is an LLC or corporation, small business owners and their personal debt are unaffected by bankruptcy.
How Chapter 13 Works for LLCs & Corporations
Chapter 13 is not available for corporations or LLCs.
Instead, this type of bankruptcy is only available for sole proprietors (and some partnerships) with regular income.
Still, a small business owner operating an LLC or corporation can file for Chapter 13 under their name (not the business’s).
Advantages of Chapter 13 for LLCs & Corporations
Because LLCs and corporations cannot file for this type of bankruptcy, there aren’t any advantages to doing so.
Still, one Chapter 13 alternative for LLCs/corporations is filing for bankruptcy under Chapter 11.
An advantage of Chapter 11 is that there are no debt or income requirements or limitations for filing!
Disadvantages of Chapter 13 for LLCs & Corporations
Disadvantages of Chapter 13 for LLCs and corporations include:
- The business owner must take on the business debt on a personal level (if they file for bankruptcy under their name)
- These entities cannot file for Chapter 13 under the business’s name
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