No two bankruptcies are the same. While there are some cases where the person or business pursuing bankruptcy must liquidate assets as in Chapter 7 bankruptcy, other times a person might end pursuing Chapter 13 bankruptcy which means they need not worry about selling anything. Instead, Chapter 13 bankruptcy involves restructuring and reducing the amount of time to pay off a debt. While businesses are not capable of pursuing Chapter 13 bankruptcy, it is a common occurrence for the small owners of businesses to file for Chapter 13. 

Due to the challenges presented by the COVID-19 pandemic and the resulting need for social distance, many companies are currently facing financial hardships. As of late September 2020, a growing number of companies are pursuing bankruptcy due to these difficulties. If you find yourself in such a situation, it is critical to understand your options as a business owner and make an assessment of whether filing bankruptcy is a good idea for your situation.

Chapter 13 Bankruptcy Allows Filer to Retain Ownership of Assets

Unlike Chapter 7, Chapter 13 bankruptcy does not require a person to liquidate assets. Business owners are often able to retain ownership of things even as they establish repayment plans that will allow them to reduce the amount of debt they owe. While it is an attractive option for taking control of debt, a person still must qualify for Chapter 13 bankruptcy. 

To qualify for Chapter 13 bankruptcy, a person’s income must be either below the state median or the individual’s debt-to-income ratio might be high enough that a court determines that a person can legitimately meet their debt obligations. If a person successfully qualifies for Chapter 13 bankruptcy, a trustee will be appointed by the court to assess both the individual’s income as well as debt to determine what payment plan should be utilized to repay creditors. In most cases, these repayment plans will last anywhere from three to five years. 

Many business owners discover that Chapter 13 provides them with breathing room. This is because a person only needs enough total income to satisfy the Chapter 13 plan’s payments as well as the individual’s living expenses. 

Sometimes, business owners discover that Chapter 13 bankruptcy means that they need to take nothing out of the company to support themselves provided other income sources exist. As a result, Chapter 13 bankruptcy can provide businesses the opportunity to stay out of the red during even difficult times. 

Additionally, pursuing Chapter 13 in such a manner often means that a person can leave the business’s credit intact, which means that investors and lenders are likely to continue working with the business. Even though it might not substantially reduce business debts, Chapter 13 bankruptcy often allows a business to stay afloat while the business owner takes control of their credit. 

Reasons to Think Twice About Chapter 13 Bankruptcy

There are several reasons why business owners decide to pursue Chapter 7 rather than Chapter 13. 

One of the most common reasons is that many business owners find that running a business that is in bankruptcy is challenging. For example, a business owner must obtain a court’s permission to borrow money or sell assets. By pursuing Chapter 7 bankruptcy, however, it is possible to conclude the bankruptcy process much more quickly than the window of time that Chapter 13 requires. 

Second, some business owners discover that it is difficult to meet the terms of a repayment plan for three to five years. A person must make these payments on time and if they fail to do so, a bankruptcy court can modify the plan. In situations where it does not appear that a person will continue meeting the terms of a payment plan, a judge will likely convert a Chapter 13 bankruptcy into a Chapter 7 or dismiss the case altogether. If the case is dismissed, a person will owe creditors the remaining balance of debts. 

Third, Chapter 13 bankruptcy is often more expensive than Chapter 7 bankruptcy. While the filing fees are about the same for either type of bankruptcy, an individual will often be required to repay at least a portion of unsecured debt in Chapter 13 bankruptcy. Chapter 7 bankruptcy does not require a person to repay unsecured debt. 

As a result of these factors, Chapter 7 is sometimes a preferable option for business owners. Instead of continuing to operate a business under the scrutiny of a bankruptcy court, some business owners make the understandable decision to pursue Chapter 7 bankruptcy and then begin a new business free of debt.

Deciding Whether Chapter 13 Bankruptcy is Right for You

Pursuing Chapter 13 is not a decision to be made lightly. Utilizing a Chapter 13 bankruptcy so a business can continue is often an even more complex decision. Not only must business owners make sure that the business will be able to return to a point where it can sustain itself, but there are also various other financial issues to consider. 

If you encounter difficulty keeping your business afloat, however, you should realize that one of the worst decisions that you can make is to do nothing and continue to let your situation deteriorate. Instead, you should begin by reviewing all of the applicable details about your financial situations so you can assess what options are available. You should then speak with financial professionals like the company’s certified public accountant who can help you evaluate what options are realistic and advantageous. 

If you decide at this point that bankruptcy is a likely option, you should not hesitate to speak with a knowledgeable attorney who can help you determine what option is best. While bankruptcy might never be an ideal solution, it provides control for people who have reached situations that often seem overwhelming.

Speak With an Experienced Bankruptcy Attorney

The Chapter 13 bankruptcy process is often a complex one. Fortunately, an experienced bankruptcy attorney can help you navigate this process. Contact attorney Melanie Tavare today to schedule a free case evaluation.