If you want to continue your business while filing for bankruptcy, Chapter 13 may be a good option. Keeping your business and other property is one of the benefits of filing for Chapter 13 bankruptcy. However, only individuals can file for Chapter 13 bankruptcy, so if your business is an LLC or Corporation, Chapter 13 won't help.
Chapter 13 is basically a court enforced payment plan. You keep your property and repay some or all of your debts. As long as you have enough income to pay your current expenses and make payments toward your debts, Chapter 13 could be a very useful financial tool to get your business back on track without losing it. However, there are some limitations, particularly with respect to the type of entity you use to do business.
Only individuals can file Chapter 13. If you operate your business as a sole proprietorship, your business is included in your personal filing. The assets are owned by you personally and the debts are owed by you personally. Chapter 13 can help you under these circumstances.
It is different if you operate your business as an entity which is legally separate from yourself, such as a corporation or a limited liability company. Legally separate business entities cannot file for Chapter 13.
If, however, you have personal liability for some of the corporation's or LLC's business debts because, for example, you personally guaranteed payment of the debts, you can include those debts in a Chapter 13.
In Chapter 13 bankruptcy, you list all of your personal and business debts and assets in your paperwork. Both your personal and business debts are paid through the Chapter 13 plan. As long as you have enough income, either from your business or from other sources, to make payments under your Chapter 13 while paying your regular operating and living expenses, you can keep your business and any other assets you own. The only requirement is that you contribute all of your disposable income to the plan and, if unsecured creditors are not paid in full, the total of all the payments under the Chapter 13 plan has to equal or exceed the amount the unsecured creditors would have received if you had filed a Chapter 7 liquidation instead of the Chapter 13.
(To learn more about Chapter 13 and how the repayment plan works, see our Chapter 13 Bankruptcy area.)
There are debt limits under Chapter 13. You can only file if your non-contingent, liquidated (easily calculated, not unspecified claims) unsecured debts are less than $394,725, and your non-contingent, liquidated secured debts are less than $1,184,200. If your debts, including the business debts of your sole proprietorship, equal or exceed these amounts, you do not qualify for a Chapter 13.
A codebtor stay means that as long as you are in Chapter 13, a creditor cannot try to collect money you owe from any cosignors or guarantors. But there is an exception -- the codebtor stay does not apply to business debts. This is not a problem if you operate your business as a sole proprietorship because both you and the business are included in the Chapter 13 filing.
It can be a big problem if your business is a corporation or a limited liability company. If you file a Chapter 13 to get rid of your personal liability for business debts, and you have guaranteed debts that are owed by your corporation or limited liability company, creditors can continue to take collection action against the corporation or limited liability company. There is no co-debtor stay. This is true even if you are making payments under your Chapter 13 plan. It is possible that some creditors of a corporation or limited liability company might be willing to wait for the payments under the Chapter 13 and continue to do business with your company, but you can’t legally force them to do this.