Sole Proprietors, Should You Choose Chapter 11 Or Chapter 13 Bankruptcy?

Law Blog

Could your business be saved by filing for bankruptcy protection? While most Americans think of bankruptcy as the liquidation of assets in order to pay debts and receive immediate discharge, bankruptcy also includes options that allow you to continue paying some debts while receiving many of the same protections.

Sole proprietors can generally access these options by filing either Chapter 11 or Chapter 13. Here's when you might consider each different chapter. 

When to Choose Chapter 11

Chapter 11 bankruptcy is a longer-term process than most other chapters, so it should be undertaken when your business needs the extra time. It can be stretched out to offer protection during longer debt repayment, including mortgages or long-term equipment contracts. This helps you avoid losing these large assets your business needs. 

Business owners who want to retain control over their business's operations may also choose Chapter 11. Unlike most other forms of bankruptcy, this chapter doesn't assign the administration of assets to a trustee but rather allows the owner to continue as a 'debtor in possession'. Therefore, you can work to streamline your business and bring it back to health while receiving bankruptcy protection. 

Finally, the discharge of debts within Chapter 11 usually occurs at the beginning of repayment instead of the end. This helps balance your books from the get-go. 

When to Choose Chapter 13

Chapter 13 is only allowed for individuals, so sole proprietors are pretty much the only type of business owner who can use it. Known as repayment bankruptcy, it allows you to reaffirm select secured loans, like equipment or vehicles, and work out a 3 to 5 year payment plan (with eventual discharge) for unsecured debts. And because you file as an individual, it has the advantage of including both personal and business debts. 

Certainly, a big selling point of Chapter 13 is that it's less expensive and less complicated than Chapter 11. For small businesses, the added cost of administrating and the length of time involved in seeking Chapter 13 can be greater than the advantages it brings. Chapter 11 is completed within a few years and has relatively simple processing rules for those who only need limited discharge and protections. 

How to Make the Right Call

Clearly, Chapter 11 and Chapter 13 have similar goals — returning your business to a profitable state — but they go about it in different ways. There is no right or wrong answer to which is right for your enterprise. The best way to decide is to work with a business bankruptcy lawyer in your state. Together, you can assess your needs and circumstances to find the best path to prosperity once again. 


28 September 2021