Chapter 13 vs. Chapter 11 Bankruptcy

Being forced to close the doors of your business will be emotional and difficult. Your stress levels will be off the charts because you have to shoulder all the responsibility for your employees and creditors. It may seem like the end of an era.

Many small business owners wonder about getting relief from their debts. This uncertainty can cause you sleepless nights, hoping that there is a solution. Is there a way out?

As one of the law firms in Portland offering this practice area, Michael D. O’Brien & Associates, P.C. understand that there are many reasons why small business owners may find themselves considering Chapter 11 Bankruptcy or another form of bankruptcy protection.

We can present available options and make recommendations to you on which type of bankruptcy filing will be best for your business, while helping to keep personal assets and finances separate from those of the company.

If you are a business owner in Portland, you should consider bankruptcy when your:

• Business is failing; or

• Business is profitable, but you cannot pay your debts.

Most business owners file for bankruptcy because their business is failing. 

If your business is failing and you have personal guarantees on its debt, you may be personally liable for the business’s debts. It may be a good idea to file for bankruptcy to protect yourself from personal liability when this happens.

You can also file for bankruptcy if your business is profitable, but you can’t pay your debts. 

Many small businesses are not incorporated, leaving their owners personally responsible for the business’s debts. If this applies to you, filing for bankruptcy may relieve some of the stress of being personally responsible for a failing business.

But before filing bankruptcy, it is important that you understand the different types of bankruptcy and how each will affect your business and its owners.

What is Chapter 13 bankruptcy?

A Chapter 13 bankruptcy lets you maintain your assets while restructuring and paying down all or part of your obligations. The Chapter 13 repayment plan lasts three to five years. You make monthly payments to the court-appointed bankruptcy trustee. The trustee will pay your creditors as per your plan.

Can A Small Business File Chapter 13?

No—Chapter 13 bankruptcy is recommended for individuals. However, there is a workaround for sole proprietors.

The Advantages of Chapter 13 Bankruptcy for a Small Business’s Sole Proprietor

Chapter 13 bankruptcy offers provisions that may help a small firm stay in operation.

Safeguard Business Assets

Because most sole proprietors require equipment and other property to operate, all bankruptcy filers may preserve (exempt) some goods essential to maintain a house and job in their bankruptcy. 

Keeping exempt and non-exempt property is an advantage of Chapter 13 bankruptcy, but it comes with a price.

• Exempt business property. It covers business-related assets up to a monetary value. The property you maintain must be reasonably required for your job, and most exemption laws enable you to pick what you keep. Plumbers, for example, will require a work van and plumbing gear. However, an accountant would need a computer, software, and a desk.

• Non- Exempt commercial property. You may maintain non-exempt assets while reorganizing and paying down debts under Chapter 13 bankruptcy (unlike in Bankruptcy Chapter 7 when the trustee sells the assets). If you have a lot of precious equipment, stock, fixtures, etc., bear in mind that you’ll need to pay for their worth in your plan.

Delete Company Debts

For lone proprietors, company obligations are treated as personal debt. If you don’t have any collateral, you’ll likely pay nothing on credit card balances, energy bills, medical bills, and overdue invoices if you declare bankruptcy.

You’ll be released from any qualifying debt when you finish your plan. The creditor cannot collect from you or your company after discharge.

Pay Off Major Debtors

As a sole owner or otherwise individually accountable for priority obligations such as taxes, you may pay them off in your payback schedule.

Reduce Secured Loans

Some secured debts (such as automobile or equipment loans) may be reduced to the property value under a Chapter 13 plan. If you choose this option, you will save money on interest and reduce monthly payments.

What is Chapter 11 bankruptcy?

Individuals, firms, partnerships, joint ventures, and LLCs may declare Chapter 11 bankruptcy (LLCs). There is no debt limit and no income requirement. However, Chapter 11 is the most difficult and costly bankruptcy option. So it’s mostly employed by enterprises, not people.

Advantages of Chapter 11 Bankruptcy for Small Business Owners

1.Maintaining a Business During Bankruptcy

Instead of shutting down operations and selling assets to pay creditors, a company in Chapter 11 bankruptcy keeps operational, although under court supervision, until filing for Chapter 13 bankruptcy. Nobody wants to close a company they’ve worked so hard to develop. Keep your customers and goodwill by filing for Chapter 11 bankruptcy.

2. Automatic Stay of Creditor Action

It prevents creditors from contacting your company, taking secured assets, or filing lawsuits to recover outstanding debts. The stay is one of the essential advantages of bankruptcy.

The automatic stay prevents repossessions, foreclosures, lawsuits, liens, and other debt collection efforts. To avoid being fined and penalized, creditors who pursue debt collection after your company has filed for bankruptcy should first seek relief from the automatic stay.

The automatic stay protects company owners from aggressive creditors. They may assess the company’s financial status, negotiate with creditors and prepare a restructuring plan.

Within 120 days of filing for Chapter 11 bankruptcy, a company may submit a reorganization plan to the bankruptcy court. Because of this, a Chapter 11 debtor has considerable influence over the restructuring process.

3. Operational Assistance

An accelerated hearing for emergency motions about the company and its bankruptcy will be scheduled shortly after a Chapter 11 bankruptcy is filed. During this hearing, the company may seek the court for permission to continue paying workers, filing and paying taxes, and fulfilling contractual obligations including rent, insurance payments, and vendor bills.

Uncertainty among workers, suppliers, and customers is reduced when a firm in Chapter 11 bankruptcy seek emergency assistance to keep afloat. 

4. Possibility of low-interest loans

A firm may request emergency authorization for funding to assist ongoing support needs such as wages or supplies to continue normal operations.

Unsecured debtor-in-possession funding is available to businesses in Chapter 11. With debtor-in-possession financing, lenders may provide more favorable conditions to corporations in Chapter 11 bankruptcy, such as precedence over pre-petition debts and obligations (even some secured debts).

In this way, creditors may be certain that their obligations would be paid first. Because of this, firms may be able to acquire much-needed funding at lower rates than before bankruptcy.

5. Expiring Leases and Executory Contracts Treatment

Consolidated debt obligations imposed by leases and other executory arrangements may drive a company into bankruptcy. The Bankruptcy Code allows businesses to reject these arrangements.

Consequently, the counterparty becomes an unsecured creditor of any unpaid contract amounts. After resolving a default, debtors may opt to assign or take over. Unless the firm subsequently rejects the contract, the counterparty must continue to comply with the contract even if the company is in bankruptcy.

Contracts continue to be flexible for firms in Chapter 11 bankruptcy. While the firm is reorganizing, they may get out of contracts they don’t need or aren’t financially viable while still benefiting from performance.

Chapters 13 and 11 are very different kinds of bankruptcy options. You have to do many things before you decide which bankruptcy option is right for you. The best way to find out which chapter is right for you is to schedule a free case evaluation with us at Michael D. O’Brien & Associates, P.C.. Our Portland Bankruptcy Attorney in Oregon will review your circumstances and explain which chapter makes the more sense in your situation.