If you're tired of juggling finances, struggling to make payroll, or have run out of ways to keep important suppliers paid, it makes sense to consider your bankruptcy options. Bankruptcy is often the only viable option for a small business in financial distress. Here's how it can help:
Below we focus primarily on the benefits of restructuring business and personal debt through payment plans using Chapters 11 and 13. Consider learning about other small business bankruptcy topics, including Chapter 7 bankruptcy for small business owners.
Chapters 11 and 13 both allow debtors to propose a plan to restructure their finances, which can help a company stay in business. If you qualify, a Chapter 11 or a personal Chapter 13 (with limitations) plan can:
Keep in mind that a business can't file Chapter 13 (with the exception of sole proprietors). But even so, a small business can benefit from an owner filing for Chapter 13 because it can free up cash, which is why some small business owners choose Chapter 13 over Chapter 11.
By contrast, Chapter 11 can provide more flexibility for the business itself, but it usually costs too much and takes too much time to be a realistic option for small business owners. Fortunately, business owners now have a cheaper choice that works more like Chapter 13 bankruptcy called "Chapter 11, Subchapter V."
Virtually anyone can file for Chapter 11 bankruptcy, but all small businesses are ineligible to file for Chapter 13 except for sole proprietors. Here's how it works.
Chapter 13 eligibility. Chapter 13 is available to individuals and sole proprietors with regular income. Small companies formed as corporations, partnerships, or other entities aren't eligible for Chapter 13 relief. However, that's not to say that someone who owns a business can't file an individual Chapter 13, and sometimes doing so helps.
Most filers' plans direct income toward the debts filers want to be paid most, like mortgages, car loans, equipment payments, and other secured obligations. Filers pay significantly less toward credit card debt, medical bills, and unsecured personal loans. Also, business debts you're personally liable for will be included in your plan.
However, not everyone qualifies for Chapter 13. You'll need sufficient income to support a Chapter 13 plan and will be subject to debt limitations that change periodically and other Chapter 13 eligibility requirements.
As of April 1, 2022, a filer's debt can't exceed $1,395,875 in secured debt and $465,275 in unsecured debt. These figures apply to cases filed between April 1, 2022, and March 31, 2025.
Chapter 11 eligibility. Almost anyone can file for bankruptcy under Chapter 11. Individuals, corporations, partnerships, joint ventures, and limited liability companies are all eligible to be Chapter 11 debtors. There are no debt or income requirements or limitations for filing bankruptcy under Chapter 11.
Chapter 11 Subchapter V is limited to "small business filers" with a total debt burden of $3,024,725 or less (valid April 1, 2022, through March 31, 2025).
Learn about other options for struggling businesses in Small Business Bankruptcy.
Chapter 11 cases are complex and expensive, which is the most significant disadvantage for small business owners. It's also why Chapter 11 cases make up only a tiny percentage of bankruptcy cases filed. However, special procedures available to small businesses through Chapter 11, Subchapter V can help lower costs significantly.
Important Chapter 11 advantages include:
Also, small business debtors can take advantage of special provisions that help streamline Chapter 11 matters. You'll qualify as a small business debtor under Chapter 11, Subchapter V if you're an individual or entity who is:
For more information, see Chapter 11 Bankruptcy: An Overview.
The biggest downside to Chapter 13 is that it's available only to sole proprietors filing as individuals. Also, the debt limitations are significantly lower than those for small businesses in Chapter 11, Subchapter V.
Other limitations include:
However, sometimes, a business owner really only needs help with personal debts. In that case, an individual Chapter 13 filing would likely be the preferred choice because:
Find out more in Chapter 13 Bankruptcy for Small Business Owners.
Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
Updated April 14, 2022