Running a small business is never easy, and sometimes small business owners find themselves struggling with mounting debt. Figuring out how to cope with that debt is a challenge, which is why some small business owners turn to bankruptcy as an option. 

Bankruptcy can be utilized by most small business owners, but they’ll need to decide between two different options, principally Chapter 7 and Chapter 13 bankruptcy. Figuring out which one works best for your situation isn’t easy, which is why it’s best to start out by getting the advice of a seasoned bankruptcy lawyer who can review your case and help guide you to the best decision moving forward.

Let’s take a closer look at the differences between Chapters 7 and 13, and what those two bankruptcy filings offer to your small business.

How Can Chapters 7 & 13 Help a Small Business?

Before deciding if either Chapter 7 or 13 bankruptcy is right for you, you need to assess your own financial situation. Do you want to continue operating your business? What’s the ratio between the debts you have — and your assets? These and many other questions will help determine the best financial path to take.

Who Can File for Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is an option available to small business owners, and they can use this for either personal bankruptcy or one for their business. However, there won’t be a distinction between the two if you’re the sole proprietor. Your business and personal debts will be resolved under the same Chapter 7 filing as a single entity. 

In fact, often a small business owner will use Chapter 7 for a personal filing, because it can wipe out their responsibility to pay business debts, such as what’s accumulated through credit card debt. If your business debt is higher than any personal debts you have, it won’t be necessary to meet the income requirements of the means test for Chapter 7.

Keep in mind, however, that in Chapter 7, a trustee will be appointed to sell any nonexempt property to help pay off your debts, so Chapter 7 is a good option for a sole proprietor who doesn’t rely on much equipment or inventory to run their business. 

If your business is a corporation or limited liability company (LLC), the Chapter 7 trustee will sell off your assets to pay creditors, so this is best for owners that want to close down and liquidate the company. And if you’re not a sole proprietor, Chapter 7 won’t allow your business to receive a discharge of its debts.

Does Chapter 13 Bankruptcy Work Better for Small Businesses?

Chapter 13 bankruptcy is only available to individuals, meaning only sole proprietors and not partnerships, corporations, or LLCs.  By filing Chapter 13, you’re able to keep your assets and establish a repayment plan to pay back your debts. That means you can keep your business running while protecting the assets you rely on to operate it. 

Keep in mind that Chapter 13 is a much longer process since you have to make monthly payments to a trustee, usually for three to five years. And while Chapter 13 wipes out your personal liability for business debts, the business itself is still required to pay back its debts through the repayment plan.

What Other Options are Available to Small Business Owners?

There are two other possibilities. Chapter 12 was created to help struggling farming and fishing businesses. To qualify, farming businesses must owe 50% or more of their debt on direct farming operations, while for fishing operations, it’s 80% or more. At least half of the overall income must come directly from farming or fishing operations. 

Chapter 11 is a business bankruptcy to reorganize debt in the same way as Chapter 13, but with a less rigid payment structure. In Chapter 11, the bankruptcy court oversees the debtor as they reorganize their debts. The debtor can continue operating their business while determining the details of the debt restructuring. This type of bankruptcy can be the most expensive and labor-intensive, so sole proprietors rarely use this.

Trusted Northeastern Louisiana Bankruptcy Lawyers

If you’re contemplating different options for filing business bankruptcy, call the trusted and knowledgeable attorneys at E. Orum Young Law Offices. With more than 35 years of experience, they understand the complexities of filing for bankruptcy and can help ensure you’re on the best course to financial freedom. They’re proud to have filed more bankruptcy cases than any other law firm in Northeast Louisiana and can help you too. Call 318-450-3192 for a free case review or contact them online today.