Chapter 13 vs. Chapter 11 Bankruptcy for Small Businesses

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1 May 2019
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Bankruptcy
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Chapter 13 vs. Chapter 11 Bankruptcy for Small Businesses

If your small business is struggling, you may be thinking about filing for bankruptcy. If you want to close your business and liquidate its assets, you will want to consider Chapter 7 bankruptcy.

Small business owners who would like to keep their business open, however, have two potential bankruptcy options. These options are Chapter 11 bankruptcy and Chapter 13 bankruptcy. The right choice for your business depends on your situation, so let’s break down the differences between the two.

Chapter 11 Bankruptcy for Small Businesses

Chapter 11 bankruptcy is available to most businesses, including small businesses. When the news reports on a large corporation filing for bankruptcy, it’s probably Chapter 11. This type of bankruptcy plan has a few characteristics that make it desirable to many businesses.

The Reorganization Plan Can Be Any Length

Under Chapter 11 bankruptcy, your business may propose its own debt reorganization plan. This is essentially a contract between your business and its creditors that states how the business plans to repay its debts. Chapter 11 bankruptcy does not impose a limit on the repayment term, so the business can make smaller payments for a longer time period if necessary.

There is Rarely a Trustee

Bankruptcy trustees, court-appointed administrators who supervise Chapter 7 and Chapter 13 bankruptcy cases, are not frequently used in Chapter 11 bankruptcy. Except in extreme cases (such as those involving fraud), a business filing for Chapter 11 bankruptcy will not have to relinquish assets to a trustee.

However, the freedoms of a Chapter 11 small business bankruptcy come at a great cost. Chapter 11 bankruptcy is known for being a lengthy, complex, and very costly process. What’s more, the majority of businesses filing for Chapter 11 fail—up to 90% of cases are dismissed or converted into Chapter 7 liquidations.

Chapter 13 Bankruptcy for Small Businesses

Chapter 13 bankruptcy relief is intended for individuals. However, if you operate your small business as a sole proprietorship, you may use this highly advantageous bankruptcy plan by filing a petition in your name. The debts from your business will be included in your plan.

Why is Chapter 13 such a desirable outcome for eligible small businesses? Here are a few advantages that come with filing for Chapter 13 bankruptcy.

Chapter 13 is Faster and Cheaper

If your business is eligible for Chapter 13, you will likely save a lot of money and time over if you elect to file for Chapter 11 bankruptcy. Although repayment plans are limited to five years, it costs significantly less to file in the first place. The plan approval process is usually much faster as well. Overall, you’re likely to get your bankruptcy done and over with much sooner if you’re able to petition for Chapter 13 bankruptcy for your small business.

Discharge Personal Debt

Sole proprietorships considering bankruptcy are likely to be struggling with non-business debt as well. If you have credit card debt, mortgage debt, or medical debt, you may be able to reduce (or in some cases, even eliminate) the amount you owe under a Chapter 13 plan. Using Chapter 13 bankruptcy to protect your business could even save your house from foreclosure.

Keep Important Collateral

If your debts are secured by collateral, Chapter 13 bankruptcy will help you protect the assets that allow your business to continue operating. Without the protection of Chapter 13, your creditors could try to seize your business assets to repay themselves. Chapter 13 will prevent these repossessions from taking place.

Hire a St. Louis Small Business Bankruptcy Lawyer

Talking to an experienced attorney who specializes in St. Louis small business bankruptcy is the first step to getting your business back on its feet. When you work with Michael J. Benson, you’ll benefit from his expertise in both bankruptcy law and accounting. You’ll get the best representation in bankruptcy court as well as the information you need to start rebuilding your small business finances. Contact us today to arrange your free initial consultation.

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