What You Should Know About Chapter 13 Bankruptcy for Small Businesses

What You Should Know About Chapter 13 Bankruptcy for Small Businesses

June 22, 2019

Chapter 13 bankruptcy for individuals gives people who do not pass the means test for filing Chapter 7 an opportunity to reorganize their debts into a repayment plan they can pay back over the course of several years. This course of action is also available to small businesses, in a few circumstances, but filing for this type of business bankruptcy in Montgomery County, TX may or may not allow you to save your company.

Chapter 13 bankruptcy for small business owners

As a general rule, most businesses cannot use Chapter 13 bankruptcy. However, if you own your company as a sole proprietor, you can get around that rule. Because you and your business are the same party in essence, your filing Chapter 13 bankruptcy basically works the same as if you’d filed Chapter 13 bankruptcy on your business’s behalf.

There are some cases in which a co-owner in a partnership may be able to benefit from filing for Chapter 13 bankruptcy, but generally partners wish to stay away from bankruptcy altogether, because most partnership agreements include stipulations that the business will close and dissolve immediately if one partner files for bankruptcy. This is because there are often unintended and unexpected consequences of filing for bankruptcy that could jeopardize business options, so including that “poison pill” encourages partners to seek other avenues.

Meanwhile, owners in corporations and LLCs cannot file for Chapter 13 bankruptcy. Our focus, then, is on the benefits of Chapter 13 for sole proprietors. Here are a few examples:

  • Maintain business assets: One of the biggest benefits of Chapter 13 bankruptcy for sole proprietors is that they’ll be able to keep both their exempt and nonexempt property. There are, however, some issues to be aware of. Business-related assets may be protected only up to a certain dollar figure, and you might need to be able to prove that those items are reasonably necessary for your work. For nonexempt assets, you’ll need to pay for the value of those nonexempt assets as part of your repayment plan, so getting rid of some of them may actually behoove you.
  • Eliminate business debts: As a sole proprietor, your business debts are not distinguished from your personal debts, meaning you can discharge business debts by filing for bankruptcy. After this discharge, creditors cannot continue to come after you for what you owed.
  • Reduce some loans: With Chapter 13 bankruptcy, you may be able to cut down the balance owed for certain types of secured debts. Doing so can reduce the burden your company faces.
  • Pay off creditors: Chapter 13 bankruptcy allows you to prioritize the money you owe to certain creditors and then pay them off in your repayment plan as is appropriate and convenient for you.

If you’re interested in learning more about filing for Chapter 13 business bankruptcy in Montgomery County, TX as a sole proprietor of a small business and why it may benefit you to do so, we encourage you to contact James R. Jones, Attorney at Law today with any questions.

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