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Chapter 11 vs. Chapter 13 for Small Businesses

In the world of entrepreneurship, it’s no secret that it can be hard for small businesses to survive. All too often, small business owners, especially new ones, take on too much debt in hopes of making enough profits to repay the debt, but much to their dismay, things don’t turn out that way. Sometimes it traces back to a lack of foresight. Sometimes it’s because of economic conditions that are completely out of the business owner’s control.

If you’re a small business owner who has no intention of shutting down your business, but who just needs some financial relief, you may be considering your bankruptcy options. Since you’re not closing down your business, we’re not discussing a Chapter 7 here. Instead, we’re comparing a Chapter 11 to a Chapter 13, the two bankruptcy options for businesses that want to continue operating.

Are You a Sole Proprietor?

Chapter 13 is not available to business entities, it is only an option for individuals. So, if you are a sole proprietor, this means that you are personally liable for your business debts. This is why you have the option to file a Chapter 13.

If your business for example, was set up as an LLC, a C corporation or an S corporation, Chapter 13 would not be an option. With a Chapter 13, the sole proprietor gets to keep their assets. The sole proprietor enters into a repayment plan to pay off all or a portion of their debts over a three to five-year time period.

Chapter 11 for Individuals & Businesses

A Chapter 11 is available to individual debtors and businesses, but it’s mostly used for businesses. When a business files a Chapter 11, it can keep its doors open and continue operating. It is however, a lot more complex than a Chapter 13. If your business owes less than a specific threshold, special provisions apply.

Related: Can You Discharge an SBA Loan in Bankruptcy?

We are just scratching the surface in regards to small business bankruptcy. If you’d like to learn more, we encourage you to contact our firm to meet with a Harrisburg bankruptcy attorney for free. We can be reached at (701) 559-0271.