Save Your Business by Filing Chapter 13 Bankruptcy Personally

During the economic shutdown, many small business owners watched the bills pile up while sheltering in place. Filing for Chapter 13 can provide a cost-effective strategy for getting finances back on track once the economy reopens.

Learn about filing for bankruptcy during the coronavirus outbreak.

Chapter 13 Benefits for Business Owners Impacted by COVID-19

Although Chapter 13 is for individuals, not companies, it can get personal debts under control so you won’t need to draw as much from your business—a strategy similar to that of a business owner filing an individual Chapter 7 case. But Chapter 13 also offers help that isn’t available in Chapter 7.

The two biggest benefits include being able to keep all of your property (even if you’re behind on a house or car payment), and the ability to use your income to pay the debts most important to you. Here’s more about the aspects of Chapter 13 that many small business owners find appealing.

What Happens To Your Mortgage, Car Payments, and Other Secured Debt in Chapter 13 Bankruptcy?

Debt secured with collateral—such as a house, car, or other property—goes back to the bank if you can’t pay in full. Chapter 13 relaxes the general rule in these ways.

  • If you want to keep your house or car (or other secured property) but you’ve fallen behind on the payment, you can spread out the arrearages over a three- to five-year repayment plan and keep the property.
  • If you owe more than the property is worth, a cramdown lets you pay the property value on some secured property types.
  • You might be able to wipe out an underwater junior loan on your residential property by stripping the lien.

Or, if you want to reduce expenses substantially or get out from under a loan, you can let the collateral go back to the bank.

What Happens To Credit Card Balances, Medical Bills, and Other Qualifying Debt in Chapter 13 Bankruptcy?

Many business people charge expenses on credit cards when the business isn’t profitable enough to take a salary—and the monthly payment can be substantial. Medical and utility bills can also add up. Most filers will pay far less on these debts each month through the plan, and any remaining balance will be erased on its completion. Unlike in Chapter 7, you can even wipe out a credit card balance on a card used to pay taxes. Learn more about the types of debt dischargeable in Chapter 13.

What Happens To Recent Back Taxes and Support Obligation Arrearages in Chapter 13 Bankruptcy?

These debts don’t qualify for a discharge in bankruptcy, and after a Chapter 7 case, you’d still be responsible for paying. The creditor could immediately take collection steps, such as through wage garnishment. In Chapter 13, you delay creditor action for the duration of the plan length and pay the balance off through the plan.

Marital Property Settlement

Divorcing spouses sometimes agree in a property settlement agreement that one spouse will take a more significant share of the assets in exchange for an “equalizing” payment paid over time. While you can’t wipe out an equalizing payment in Chapter 7, you can pay less than the amount agreed to in a property settlement in Chapter 13, and the court will erase the balance at the end of the case. Support payments are never dischargeable in bankruptcy, however.

Example. Oliver owes $150,000 property settlement from a prior marriage and $20,000 in credit card debt. In his Chapter 13 repayment plan, he pays $300 per month towards the balance for a total of $18,000 over five years, thereby saving Oliver $152,000.

Learn about more debts you can wipe out in Chapter 13 but not Chapter 7.

Other Legal Problems

Shaking off a lawsuit isn’t always a result of filing for Chapter 13—sometimes, it follows you to the bankruptcy court. But in many instances, a creditor who is suing you in state court will take the Chapter 13 payment amount and won’t waste additional time and money pursuing the lawsuit. Find out when a pending lawsuit will go away in bankruptcy and when a lawsuit will follow your bankruptcy case.

Should You File for Chapter 13?

Chapter 13 has benefits that Chapter 7 doesn’t have, but it comes at a cost. You’ll have to pay into a repayment plan for three to five years. Even so, in some cases, filing for Chapter 13 is better than Chapter 7 for small business owners—and in other cases, the filer doesn’t have a choice. Here’s a brief list to help determine whether Chapter 13 is the best option.

  • You don’t qualify for Chapter 7 because you earn too much money, and your consumer debts exceed your business liabilities—in other words, you can’t pass the Chapter 7 means test.
  • You’d lose property in Chapter 7 that you’d like to keep—possibly even the business itself. Find out about protecting property with bankruptcy exemptions.
  • You qualify for Chapter 7, but Chapter 13 offers a benefit not available in Chapter 7.

Do You Qualify for Chapter 13 Bankruptcy?

Like all chapters, Chapter 13 has qualification parameters that you’ll have to meet. It’s available to people whose debts don’t exceed $1,257,850 of secured debt (debt that’s secured by collateral, such as a house or equipment), and $419,275 of unsecured debt (such as credit card balances, medical bills, and personal loans). (Figures are accurate as of May 2020.) If your obligations exceed these amounts, you can use Chapter 11 (it’s available to individuals and businesses).

Chapter 13 has additional requirements, too. You must have enough income to pay each of these categories of debt. If you can’t cover each amount, you won’t qualify.

  1. Living expenses. You’ll have to show that you can pay your monthly living expenses (some actual, some allowed by statute), including a monthly rent or mortgage payment, vehicle payment, utility expenses, food, and other necessary costs.
  2. You must pay outstanding arrearages for any property securing a debt that you’d like to keep, such as car payment or mortgage arrearages. Recent past tax balances and support arrearages must be paid in full over the length of the plan, too.
  3. Nonexempt property value. If you’re keeping nonexempt property (assets you can’t protect with a bankruptcy exemption), then you’ll have to pay an amount equal to the nonexempt property (minus sales costs) to your unsecured creditors—possibly more. The “best interest of creditors” rule requires you to pay your unsecured creditors at least as much as they would have received in a Chapter 7 case, and can pose a problem if your business (or any other property you own) is valuable. You’ll have to declare the value of your interest and pay that amount if an exemption doesn’t cover it.
  4. Disposable income. If you have anything leftover, you’ll pay it to your unsecured creditors on a pro-rata basis.

Learn about the CARES Act stimulus payments and bankruptcy qualification.

Chapter 13 Repayment Plan Amount and Length

Debtors who are entitled to file for Chapter 7 can pay into a three-year plan and will stop at step three (but many opt for a five-year plan to lower the monthly payment). Otherwise, you’ll pay into a five-year plan and go through all four steps. Determining a Chapter 13 monthly repayment plan payment is complex, and you’ll likely want professional help.

Meet With a Bankruptcy Lawyer

When a business is involved in a bankruptcy case—even if the company itself isn’t filing—the case will be more complicated. For instance, you’ll turn over two sets of financials, yours and company’s, instead of just your own.

Plus, all of the benefits offered by Chapter 13 can’t be covered in one article, and another bankruptcy chapter might serve you better. Or even a solution outside of bankruptcy. A bankruptcy lawyer experienced in business-related cases will be in the best position to advise you about all of the options available given your unique circumstances.

Learn more about other options in Choosing the Right Small Business Bankruptcy Option During the Coronavirus Outbreak.

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