What Happens When a Small Business Owner Needs To File for Bankruptcy?
Chapter 11 bankruptcy is often what you hear about in the news when big companies “go under,” and in fact, few small businesses want to file for bankruptcy under Chapter 11. Because this type of bankruptcy is designed mostly with big corporations in mind, the process can be riskier for small businesses to go through.
The other option for small businesses — the one that isn’t discussed too often — is filing for Chapter 13 bankruptcy. (In fact, even though business bankruptcies only represent about 3% of the 1.5 million bankruptcy cases in the U.S. each year, it’s rare that anyone discusses cases that don’t involve big corporations). A chapter 13 bankruptcy claim is typically considered a personal bankruptcy proceeding but it can apply to small business owners in certain situations.
Here’s a quick look at how Chapter 13 bankruptcy cases can work for small businesses:
- The process for a small business Chapter 13 claim is very similar to what individuals would encounter filing under Chapter 13 for personal bankruptcy. Instead of debt liquidation, this type of bankruptcy allows for individual/small business owner to work with the court on a debt repayment plan. This plan usually lasts between three and five years.
- In order to qualify for a Chapter 13 bankruptcy, a business must be owned and operated by one person. If a business is a separate legal entity, such as a corporation or a limited liability company, it cannot file for bankruptcy under Chapter 13. Partnerships with other companies also exclude a business from Chapter 13 protection. A small business must file a petition with the court before being approved for a Chapter 13 case, and must also pay a legal fee (which is usually around $310).
- There are different types of debts that will determine how much money is paid back to creditors, and how long the new repayment plan will last. In general, the more money a business owes to creditors, the more the owner will be expected to pay back.
- Because a business has other financial obligations that a regular individual wouldn’t have, there are certain types of priority debts that must be paid off in full, regardless of the repayment plan. For a business, these debts would likely include things like taxes and employee paychecks.
- The biggest benefit of a Chapter 13 bankruptcy for small businesses is the same as for a personal bankruptcy claim: you get to keep the most amount of your assets as possible. For a business, this means you can keep your company operating and can pay off your debts in a reasonable time period.
Bankruptcy isn’t the perfect choice for every individual or for every business. But with the help of a trusted bankruptcy attorney, it can serve as a valuable foundation for a new beginning.