Starting a business is always a financial risk. When the market turns or your company just isn’t reaching its benchmarks, debt can pile up quickly. With personal investments and business assets on the line, you may find yourself looking to a bankruptcy payment plan for a way out. But can a business owner file Chapter 13 bankruptcy?

Deciding whether - and how - to file a bankruptcy for your business requires a careful look at how your business is structured and what you are personally responsible for if your business can’t pay its bills. These decisions should not be taken lightly. If you are a business owner considering filing a Chapter 13 bankruptcy, you should sit down with an experienced bankruptcy attorney to weigh all your options and pick the best protection for you and your business. However, some general rules can give you an idea of the direct things may go. Here are a few guidelines to consider.

Chapter 13 Is for Individuals Only

A business entity cannot file a Chapter 13 bankruptcy. That form of debt relief is available to individuals only. Companies organized as LLCs and corporations cannot use the debt restructuring tools included in a Chapter 13 bankruptcy to pay down their business loans or avoid liquidation the same way individuals can. Instead, they will need to file a Chapter 11 bankruptcy to deal with their corporate debts.

However, business owners can sometimes still qualify for Chapter 13 bankruptcy. If they meet the necessary income requirements, a business owner can file for bankruptcy to resolve personal debts. That can sometimes include erasing personal liability on company contracts (like when they sign a personal guarantee on the lease for their store’s retail space). That doesn’t mean the company itself is off the hook, but it does mean that if the business stops paying its bills the landlord or creditor can’t come after the business owner for the difference.

Chapter 13 Bankruptcy for Sole Proprietors and Partnerships

It is easy to file limited liability corporation (LLC) paperwork and incorporate your business. But many business owners don’t take that added step. If you just started working, either alone or with a business partner, you may be able to use a Chapter 13 Bankruptcy to address all your debts - personal and business alike.

Sole proprietorships (unincorporated companies with one owner) and partnerships (unincorporated companies with more than one owner) are not separate legal entities. Essentially everything that these business owners or partners do is part of their personal financial affairs. There are a lot of downsides to running your business this way, including the fact that your business creditors can come after your personal assets when you fall behind. However, there is one upside: the ability to use a Chapter 13 bankruptcy to restructure all of your debt. If you are a sole proprietor or partner in your business, filing a Chapter 13 bankruptcy may allow you to:

• Exempt “tools of the trade” and other business assets needed to operate your business up to a specific dollar amount.
• Reorganize your business and personal debts together into a payment plan based on your income as a business owner
• Erase remaining balances on unsecured business and personal debts after the payment plan is successfully completed
• “Cram down” the balances on secured debts (including company cars or equipment loans) to the current value of the property

Partners in a multi-person business should be wary of using a Chapter 13 bankruptcy unless everyone involved in the business is on board. If one partner files for bankruptcy while another partner is still solvent, the creditors could still come after the non-filing partners to satisfy the rest of their debts.

The Downside to Business Owners Filing Chapter 13 Bankruptcy

Even if you qualify, Chapter 13 may not be your best choice. That’s because the payment plan that allows individuals to keep more of their assets will take three to five years to pay off. During that time, you promise the bankruptcy court that you will not take on any new debt. If you plan to wrap up your business while you pay off the debts, that may not be a big deal. But if your plan is to keep operating your business as you complete the payment plan, you may find you have painted yourself into a corner.

Most of the time, if you are looking at bankruptcy options, it is because your business is not solvent and your expenses are higher than your income. In those cases, a Chapter 13 bankruptcy can interfere with your ability to take out a new business loan and keep the doors open. Without the ability to negotiate with investors and take on new debt, you may quickly find your only option is to go out of business.

Considering Other Options

If you are a shareholder of a corporation or a member of an LLC, or if Chapter 13 doesn’t give you the flexibility you need to keep your business going, you may want to consider a Chapter 7 or Chapter 11, or other non-bankruptcy options to reduce your debt and streamline your business. There are downsides to these options as well. Which is the least painful will depend on how your business is structured, and what your goals are for your business.

At John A. Steinberger & Associates, P.C., we are a full-service bankruptcy law firm in Southeast MI. We serve debtors, including business owners, in Southfield, throughout Metro Detroit, and in the surrounding communities. We will help you review your company structure, operating agreements, and your bankruptcy options and choose the strategy that is right for you. Call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.