Which Chapter of Bankruptcy Is Used for a Family Owned Business
Learn about the differences betwixt Chapter 11 and Affiliate 13 business bankruptcies.
Updated Oct ix, 2020
For a modest business in financial distress, bankruptcy might be the but viable choice. If yous demand help keeping your company adrift, restructuring debt nether Affiliate xi or Affiliate thirteen (with limitations) might be the life preserver needed to stay in business.
By contrast, if your business is closing, a "straight" or "liquidation" bankruptcy might be the amend option. For assist, see Chapter vii Bankruptcy for Small-scale Businesses or larn about the differences between Affiliate 7 and Affiliate 11 bankruptcy.
Reorganization Benefits for Small Business organization Owners
Chapters 11 and 13 both allow debtors to propose a plan to restructure their finances, which in turn can help a company stay in business. If you authorize, a Chapter 11 or xiii (with limitations) plan can:
- permit you to retain property needed to operate your concern
- give y'all time to sell assets yous don't need or tin can't afford to go along
- modify payment terms on secured debts (like existent property mortgages or equipment loans), and
- belch (eliminate) obligations that you can't pay over the plan term (in Affiliate 11 only).
Most small business owners, when possible, choose Chapter 13 over Chapter 11 (a business organization tin can't file for Affiliate thirteen—more below). By dissimilarity, Chapter 11 can provide more flexibility, simply it usually costs too much coin and takes as well much time to be a realistic selection for small-scale business owners.
Eligibility for Chapter 11 or Chapter 13 Bankruptcy
Virtually anyone can file for Chapter 11 defalcation, whereas many small businesses are ineligible to file for Chapter xiii.
- Chapter 13 eligibility. Chapter 13 is available to individuals with regular income. If you operate your business every bit a sole proprietorship, yous can have advantage of Chapter 13 by filing a petition in your proper noun. Your business debts will be included in your plan. Small companies formed as corporations, partnerships or other entities aren't eligible for Chapter 13 relief. Even so, that'south not to say that someone who owns a business concern tin can't file an individual Chapter 13--sometimes it helps. Chapter thirteen is also subject to debt limitations, which modify periodically. As of April 2019, a filer's debt can't exceed $i,257,850 in secured debt and $419,275 in unsecured debt. (Learn more about eligibility for Affiliate thirteen bankruptcy.)
- Affiliate 11 eligibility. Most anyone can file for defalcation under Chapter eleven. Individuals, corporations, partnerships, joint ventures, and express liability companies are all eligible to exist Affiliate 11 debtors. There are no debt or income requirements or limitations for filing bankruptcy under Chapter 11.
Learn about other options for struggling businesses in Pocket-size Business organisation Defalcation.
Chapter 11 Proceedings: Pros and Cons
Affiliate 11 cases are circuitous and expensive, which is the about significant disadvantage for pocket-sized business concern owners. It's also why Chapter 11 cases make upwardly only a tiny pct of bankruptcy cases filed. However, special procedures available through Affiliate 11, Subdivision 5 tin can help lower costs for small-scale businesses.
Important Chapter 11 advantages include:
- The plan creates new contract terms betwixt the debtor and creditors and tin be as long as needed, which is helpful for a small concern debtor who needs extended payment terms on real property mortgages or equipment loans.
- If less than the full balance on a particular debt is to be paid in the plan, the debt discharge will occur at plan confirmation (approval) rather than afterwards completion of the plan, unless the courtroom approves a plan without creditor consensus in a Affiliate 11, Subchapter V case.
- Chapter 11 doesn't require debtors to turn over their disposable income to a trustee. The "debtor in possession" remains in control of the business concern.
- In Chapter 11, the appointment of a trustee to manage the case is the exception rather than the dominion and ordinarily appointed for gross mismanagement or fraud.
Too, 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 5 if you're an individual or entity who is:
- engaged in business or other commercial activities, and
- meets electric current debt limitations, excluding obligations owed to insiders such as family members of the business organization owner. The current debt limit of $7,500,000 is effective until March 26, 2021, and will revert back to $ii,725,625 or less thereafter (bank check the figures on the U.Southward. Courts Bankruptcy webpage).
For more information, see Chapter 11 Bankruptcy: An Overview.
Affiliate 13 Proceedings: Pros and Cons
The biggest downside to Chapter xiii is that it's available only to sole proprietors filing every bit individuals. Also, the debt limitations are significantly lower than those for small businesses in Chapter 11, Subchapter Five. However, sometimes a business owner simply needs assist with personal debts. In that case, an individual Chapter thirteen filing could be beneficial.
Other limitations include:
- Chapter 13 plans are express to five years, which can be difficult if the debtor must pay a lot to retain assets needed to continue in business. For instance, the debtor might owe substantial arrearages for equipment used equally collateral to secure an overdue debt.
- The debtor must pay all disposable income—the difference between his or her monthly earnings and the amount reasonably necessary for support—into a repayment plan.
- A Chapter xiii trustee is always appointed to distribute program funds to
Otherwise, Chapter thirteen would likely be the preferred choice considering:
- It'south significantly cheaper to file for Chapter 13 than Chapter xi.
- The plan approving process tends to be quicker.
- A debtor tin belch more debt types, such every bit nonsupport obligations arising from a marital property settlement agreement.
- The court will shorten the commitment period if the debtor pays all unsecured creditors in full.
Find out more in Chapter 13 Bankruptcy for Small Business Owners.
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Source: https://www.nolo.com/legal-encyclopedia/chapter-13-chapter-11-bankruptcy-small-business-owners.html
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