Chapter 13 for a Business Owner: 6 Reasons It Rarely Works and 3 Where It Does

Does Chapter 13 work for a business owner? It can, but rarely. Corporations and LLCs cannot file at all. A sole proprietor (or a landlord) can usually do Chapter 13 if your debts are below the limits and you can get your income steady enough to make the payments.

Chapter 13 Limits

Chapter 13 is limited to individuals. A partnership can’t file either, though partners may file individually.

The Chapter 13 limits are pretty low: $1,580,125 secured, and $526,700 unsecured. As a business owner, you may owe more than the limits, but it depends. Important exception: Contingent debts and unliquidated debts don’t count. Be aware: a temporary higher limit of $2,750,000 on both types of debt expired.

Even if you stay under the Chapter 13 limits, you have to show you can make the payments over a maximum of 60 months. If your business assets are worth less than the secured debt on them, you can pay the debt down to value over the life of the plan.

If you owe taxes you can’t pay, a Chapter 13 repayment plan can be useful. You can spread the payments out over 60 months. But, the taxes will have to be paid in full with no reduction or discount, with a few limited exceptions. For a business, though, that could be too much to pay through the plan. Suppliers are another issue: you may have gotten products or goods from them during the 20 days before you filed. If so, they can file an administrative claim against you. They also may be able to get their goods back.

Oversight over Your Business Operations

The Chapter 13 trustee has oversight over your business operations. If you are in business, the trustee may want to see evidence of two years of tax returns, your books, and monthly profit and loss statements. You may have to report periodically. Any history of mismanagement of the business may be reported to the court. If you have a storefront or other significant place of business, a visit from the trustee may be in the cards. That much transparency is unwelcome to many.

It’s time consuming. Once you are in bankruptcy your schedules must list all the business’ property: inventory, accounts receivable, equipment, furniture, licenses, customer lists. Banks, utilities and insurers must be told about the case.

You should expect to pay more for your lawyer, because filing a Chapter 13 for a business has more moving parts. And the trustee will be taking out a fee, up to 10 percent of each payment. Your co-signers on business debts are not protected from lawsuits to collect from them during your Chapter 13 case. Like everyone else in consumer bankruptcy, you will have to take a consumer credit counseling course before filing and a financial management course before getting a discharge.

Chapter 13 Can Work for a Business Owner

However, despite all those challenges, Chapter 13 can work for a business owner, depending on the business, the numbers and the individual’s circumstances.

First, it can help keep you in business. If a self-employed person is using trade credit in the running of a business that they own, then they can continue doing that through Chapter 13. And the expenses of running the business are taken out before determining disposable income.

Second, compared with Chapter 11, there’s no disclosure statement, the absolute priority rule doesn’t apply, the filing fee is lower, and the quarterly U.S. Trustee fee doesn’t apply. So it’s cheaper up front, and easier to get a plan confirmed. And you can cure a mortgage default over the life of the plan.

And third, the discharge. Once you have made the last plan payment, you are entitled to a Chapter 13 discharge. When you get a discharge, you no longer have legal responsibility for debts covered by it. There are some debts that can’t be discharged in a Chapter 7 but can be in a 13. One is willful and malicious damage to property. Another is a debt you take on to pay nondischargeable taxes.

But if what you have doesn’t seem to be working, look at Chapter 11, Subchapter V. Subchapter V applies if at least half of your debt comes from the business. The debt limit is $3,424,000, much higher than for a Chapter 13 case. You should consult with an experienced bankruptcy lawyer to see which one might be right for your case.