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If your small business is struggling with debt, filing for bankruptcy might be a good choice. Small business owners have several options available to help eliminate debt. The best option is to consult an attorney to discuss all the alternatives available based on your unique needs and circumstances.

What are the differences between Chapter 7, 11, and 13 bankruptcy? 

Depending on the structure of your business, different kinds of bankruptcy relief are available. Chapter 7 and 11 bankruptcy are available to both businesses and individuals, whereas a Chapter 13 bankruptcy is available only to individuals. Nevertheless, if you are part of the 70% of U.S. businesses that operate as sole proprietorship (or have signed personal guarantees for business debt), this line between business and personal bankruptcy is blurred. 

What options are available to small business owners? 

A Chapter 7 bankruptcy is available to both businesses and individuals. If you are a sole proprietor, a Chapter 7 bankruptcy allows you to discharge both the personal and business debts in a single action. A Chapter 7 can help you begin with a fresh start, while still using exemptions to protect business assets. 

If your small business is a partnership, corporation, limited liability company (LLC), or other incorporated entity, a Chapter 7 bankruptcy on behalf of your business would liquidate your business assets and use the proceeds to pay creditors. In most situations, an individual is not liable personally liable for his businesses debt. This means that unless you signed a personal guarantee on the business debt, a Chapter 7 bankruptcy on behalf of your business would shut down your business and liquidate all assets, while wiping out all company debt. 

A Chapter 11 bankruptcy is different. A Chapter 11 bankruptcy is available to both businesses and individuals, but is by far more commonly used by businesses to reorganize debt. A Chapter 11 bankruptcy allows the borrower to remain in possession of the assets and to continue to operate the business under the oversight of both creditors and the court. Nevertheless, the slow pace of a Chapter 11 reorganization, coupled with high cost and the fact that most Chapter 11 bankruptcies are unsuccessful, can make Chapter 11 an unattractive option for most small business owners. 

Conversely, a Chapter 13 bankruptcy is only available to individuals. If you operate as a sole proprietor or have signed personal guarantees of business debt, a Chapter 13 bankruptcy can help. In a Chapter 13 bankruptcy, you remain in possession of all of your assets while paying back some or all of your debt in a repayment plan. A Chapter 13 bankruptcy allows you options not available in a Chapter 7 bankruptcy, like “cram downs” (reducing the principle balance of secured debt) or paying off priority creditors. A Chapter 13 bankruptcy might also help those sole proprietorships that may not have enough exemptions to keep certain assets in a Chapter 7 bankruptcy. Nevertheless, a Chapter 13 bankruptcy comes with significant drawbacks in that it is not available to businesses operating as separate entities, and it is also a significantly longer process, requiring payments to a trustee over 3-5 years. 


If your small business is burdened by debt, let the attorneys of Levitt & Slafkes, P.C.. help you explore your options. We represent debtors in Chapter 7, Chapter 13 and Chapter 11 filings. Contact our law firm online or by calling 973-323-2953 to schedule a free initial consultation.