Sole Proprietor “Business” Chapter 13 Cases: Yes, You Can Do It!

18 Oct Sole Proprietor “Business” Chapter 13 Cases: Yes, You Can Do It!

If you have a small business which is a sole proprietorship, you can file a chapter 13 case, usually with no more difficulty than a non-business case. All you need is an experienced bankruptcy lawyer, preferably one who has done business chapter 13 cases before.

It isn’t true that sole proprietors must do a chapter 11 or 12 instead (way too expensive!); it isn’t true that sole proprietors must do a chapter 7 only; it isn’t true that you must give up your business; in fact, chapter 13 is ideal for small business people who desire to keep their businesses going, and who can make a monthly payment toward their debts, and who need a discharge of debts at the end of the case, even though their debts have not been paid in full.

Yes, you heard it right: in a business chapter 13 case, you pay what you can afford (usually) toward your debts for three to five years, by making a monthly payment to the chapter 13 trustee. At the end of the case, your partially paid down unsecured debts are discharged. You keep your business, and all the other property you own, in return for doing this. Chapter 13 is a seriously good deal for small business persons who might otherwise lose significant assets in a chapter 7 case.

To be eligible for a chapter 13, you must be an individual (not a corporation). You must have regular income, either from your business, employment or some other source. Your unsecured debts must total $336,900 or less; your secured debts must total $1,010,650 or less. If you are over the debt limits, you have to do a chapter 11 instead, which is much more paperwork and much more expensive in terms of attorney fees.

The bankruptcy forms are exactly the same for either a business or personal chapter 13, except that business cases have to file an extra one or two page form explaining what their typical monthly business income and expenses are, in addition to the two page form explaining their household income and expenses.

You also have to submit the “means test” form, and if your annual after-expenses business income puts you above your state’s median income for a household of your size, the means test might have an impact on the amount of your monthly plan payment, the same as non-business chapter 13 filers. If you are below the median income you usually do a three year plan; above, you usually do a five year plan.

Your chapter 13 repayment plan is the same for both business and personal cases. You typically keep paying your rent or home mortgage payment; your car and other vehicle loans have to be paid either by you or through the plan, or else you surrender unneeded vehicles to the creditor; most back taxes must be paid in full through the plan; other secured debts must be paid through the plan, or else surrendered to the creditor; but your unsecured creditors are only paid based on what your budget shows you can afford, which could be pennies on the dollar (unless you are one of the rare debtors affected by the means test).

Unlike chapter 7 cases, it is virtually unheard of to lose any of your property or possessions to a liquidation by the trustee. This is major advantage of chapter 13. You can even file chapter 13 right after doing a chapter 7, even though you wouldn’t get another discharge at the end of such a case. This may be a good strategy if you are over the debt limits for a chapter 13, but need substantial time to stretch out payments owed on mortgage arrearages, back taxes, or past-due secured business debts.

Some chapter 13 trustees require that business debtors submit a monthly or quarterly business income-and-expenses statement, to see if you can afford a larger plan payment. It is rare for a trustee to request that any debtor increase his plan payment unless there is a large, and consistent, increase in after-expenses income. And, since you ought to be keeping such an income-and-expenses record anyways, this should not be a serious problem for most business chapter 13 debtors.

If you are self employed or a sole proprietor, and are considering bankruptcy, chapter 13 is just as viable an option for you as it is for anyone else.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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