A Chapter 13 bankruptcy provides your business with relief from the collection process while you reorganize your debts into a practical repayment plan. Whether a Chapter 13 bankruptcy is available depends on how your business is organized and the amount and type of debt it has.
Assuming you are eligible to file Chapter 13 bankruptcy, you'll need to determine if the income from your business is sufficient to complete a repayment plan and allow you to regain control of your company's finances.
Business Organization Eligibility
Chapter 13 bankruptcy is intended for individuals with a regular income who can repay their debts in three to five years. Your business debts are eligible for Chapter 13 relief if the business is organized as a sole proprietorship, which means you are self-employed. Corporations and partnerships are not eligible for Chapter 13 bankruptcy and must file under Chapter 11 to reorganize debts.
Debt Limit Eligibility
Your eligibility for Chapter 13 depends on the amount of debt you owe at the time you file your bankruptcy petition with the court. The debt limit is adjusted every three years to reflect changes in the Consumer Price Index for All Urban Consumers, published by the Department of Labor.
The adjusted debt limits are published by the Judicial Conference of the United States in the Federal Register. Since the last adjustment became effective on April 1, 2010, the dollar limit in Chapter 13 cases for unsecured debts, such as unpaid credit card balances, was set at $360,475.
For secured debts, such as the mortgage on your home, the dollar limit was set at $1,081,400. These figures will remain in effect until April 1, 2013 when the next three-year periodic adjustment is scheduled to take effect after publication on the Federal Register. The adjusted dollar limits for Chapter 13 debts will continue to be published on the Federal Register every three years.
Non-Dischargeable Tax Debts
If your business debts include delinquent tax payments for payroll withholdings, choosing Chapter 13 may be your only viable option. These tax payments are called "trust fund taxes" and are the amounts withheld from your employee's paychecks. Because the debt for trust fund taxes is not dischargeable in Chapter 7 liquidation, your only option for managing these debts is to include them in a Chapter 13 repayment plan.
Preparing the Repayment Plan
The essence of Chapter 13 is your plan to repay your debts over a three- to five-year schedule. Because bankruptcy court rules require you to file your repayment plan within 14 days of filing your petition, it is imperative that you prepare your plan before filing your petition.
A good strategy is to prepare your plan in conjunction with the requirement that you receive credit counseling from an approved credit counseling agency at least 180 days before filing your Chapter 13 petition. If you are not prepared to file your repayment plan shortly after filing your petition, you may not be able to meet the court's deadlines and your case may be dismissed.
A Chapter 13 filing can protect your business from its creditors and preserve assets (such as your home's equity) that may be subject to your business creditors. However, effective use of Chapter 13 requires that you have the ability to repay your business debts.
If the debts are the result of a temporary downturn and future business prospects look good, filing for Chapter 13 can make sense. However, it may not be a wise decision if the business income will not support a repayment plan as well as your own living expenses.
A Business Bankruptcy Lawyer Can Help
The law surrounding Chapter 13 business bankruptcy is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a bankruptcy lawyer.