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Should small business owners file for Chapter 7 or Chapter 13?

by | Jul 11, 2017 | Blog

Small business owners face an uphill battle in the marketplace. It becomes even more precarious when there are unkind financial events. For instance, according to federal data, during the Great Recession between 2008 and 2010, the United States lost more than 170,000 small businesses.

For small business owners facing financial trouble, bankruptcy can be a viable option to get out of it. However, it is important to understand the types of bankruptcies available and how they can affect companies. Chapter 7 and Chapter 13 are the most widely used by business owners. Entrepreneurs should make themselves familiar with the differences and benefits of both.

Chapter 7

Chapter 7 bankruptcy is available for both business entities and individuals. It is beneficial if the business owner wishes to continue operating the company once the process is complete. In addition to wiping out business debts, Chapter 7 can also eliminate personal ones.

If the goal is to eventually liquidate the failing business, then Chapter 7 is a viable option. This action is mostly used by businesses that qualify as limited liability companies, corporations or partnerships.

Chapter 13

Chapter 13 bankruptcy is typically only available to individuals. However, if a person is the sole proprietor of a business, then Chapter 13 might be utilized. It cannot be used for LLCs, corporations and partnerships.

Chapter 13 is a good option for entrepreneurs who want to keep the company running during the bankruptcy. All the assets remain in the business owner’s control. The main thing that happens is that the debts are restructured, making them easier to pay off. Chapter 13 also gives businesses some leeway in certain areas, such as paying back priority creditors first.

Although there are benefits to both of these types of filings, there can be drawbacks for certain entities. It is vital for business owners contemplating bankruptcy to review all options before committing to any repayment plan.


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