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Bankruptcy options for small business owners: Chapter 11 vs. Chapter 13

by | May 3, 2023 | Bankruptcy & Reorganization

The recent bankruptcy of former behemoth Bed Bath & Beyond was a sobering reminder that even giants can stumble and fall when an economic downturn and bad decisions collide.

Small businesses are especially vulnerable to factors that may be out of their control, resulting in the need to file for bankruptcy protection. There are two options: Chapter 11 and Chapter 13 bankruptcy. Let’s look at the details and how they differ.

Chapter 11 Bankruptcy

Otherwise known as a “reorganization bankruptcy,” Chapter 11 allows owners to retain control of their business and continue operating normally. In some instances, the owner can even apply for new loans.

Chapter 11 hinges on what’s contained in the proposed reorganization plan and whether creditors vote to approve that plan. The business owner, or “debtor,” must file a substantial amount of paperwork, including details on assets, liabilities, income, expenditures and a litany of other information.

If that paperwork and the reorganization plan are deemed satisfactory, the court will approve the plan and then the wheels are set in motion.

Importantly, businesses formed as a sole proprietorship must list the owner’s business and personal assets. Owners who formed their business as a partnership may also have to provide an accounting of their personal assets.

Finally, there are two categories under Chapter 11 designed for small businesses, a “small business case” and a “subchapter V.”

Chapter 13 Bankruptcy

This form of bankruptcy is mainly for individuals, but unincorporated small businesses, namely sole proprietorships, are eligible too. Chapter 13 revolves around a debt repayment plan by the owner, also known as a “wage earner’s plan.”

If the business owner has a regular income, they can make arrangements to pay their debts over three to five years, depending on the size of that income. This gives the owner breathing space to get themselves out of debt, safe from harassment by collections agencies.

Like Chapter 11, applying for Chapter 13 bankruptcy requires the debtor to submit an accounting of their business and personal assets, liabilities, income, expenditures, monthly living expenses and other current and future financial information.

A trustee is assigned to the case, compiling the financial disclosures listed above and overseeing the repayment plan. Finally, a court must approve everything.

Like forming a business, crucial decisions must be made at the beginning of bankruptcy planning. A bankruptcy attorney can guide this process to maximize the business owner’s best interests and future endeavors.