Chapter 7 and Chapter 13 Are Quite Different
“Straight bankruptcy” Chapter 7 is a “liquidation” procedure. Your assets are reviewed, mostly by you listing them by categories in the bankruptcy “schedules,” with the help of your attorney, and being asked questions about them by the Chapter 7 trustee, both while you’re under oath. The trustee determines whether you have any assets that are not covered by property “exemptions.” If so, they are sold by the trustee and the proceeds divided among your creditors. However, in most Chapter 7 cases—at least most consumer ones—all of the debtors’ assets are exempt, and so the trustee takes nothing from them.
Either way, the focus is mostly on assets. A “no-asset” Chapter 7 case—in which the trustee takes and liquidates nothing—usually takes no more than four months from beginning to end. The point of Chapter 7 is to get debts discharged—legally written off—and get a fresh financial start quickly.
In contrast, the “adjustment of debts” Chapter 13 procedure is a payment program, usually lasting three to five years. It generally allows you to keep assets, including ones that would not be exempt under Chapter 7. Chapter 13 case can also give significant advantages in dealing with home mortgages, vehicle loans, income and withholding taxes, child and spousal support, among others. You and your attorney propose a formal plan for dealing with your debts, especially these special ones, which then goes through a court-approval process. The point of Chapter 13 is to adjust your debt payments, usually by significantly reducing how much you must pay each month and how much you would pay overall.
Chapter 13 Can Only Be Filed by “Individuals,” Not Businesses
Chapter 13 can only be filed by people, not by corporations, limited liability companies, or business partnerships.
So if your business is a sole proprietorship—if you are doing business under your own name or under an assumed business name—then your personal Chapter 13 filing will cover both you and your business. That’s because the business is not a legal entity separate from you—it does not own assets or owe debts in its own name, only through you.
If on the other hand your business is in the form of a corporation, limited liability company, business partnership or similar kind of entity, it can’t file a Chapter 13 case. YOU could file a personal Chapter 13 case to deal with your personal liabilities, including those arising from your business, but the business itself would not be protected by your bankruptcy filing. In some relatively rare situations—mostly if the business itself has no debts or no debt problems, and so does not need bankruptcy protection—this may still be a feasible solution.
Risk of Your Business Being Not “Exempt” Under Chapter 7
Because Chapter 7 focuses on liquidating assets, including whatever business assets you own, it’s often not a good option if you want to keep your business in operation.
If the business is a sole proprietorship, then every asset of your business is directly yours personally in the eyes of the law. So if any such asset is not “exempt” (legally protected), the bankruptcy trustee could take it from you and sell it to pay your creditors. This includes not just tangible assets like business equipment and inventory, but also any intangible assets, such as accounts receivable and pending contracts, and possibly even customer lists, brand names, website domains, and any intellectual property.
Furthermore, because the trustee legalistically become the temporary owner of your business, if there is any liability exposure and you don’t have good business liability insurance he or she may want to shut down the business to avoid the risk of liability.
If your business is not a sole proprietorship but you are the only or a major shareholder or owner, when you file a Chapter 7 case your share in the business is one of your assets. So, your share of the business is subject to being taken and sold by the trustee if it is not exempt. Your business may not have any value, or not much, and so your share in it may have no value or very little. But there is still the risk—again, if that share is not exempt and protected—that the trustee could find a willing buyer, including potentially a competitor who would be happy to buy you out and either take over or simply shut down the business.
Clearly, there are serious risks to filing a Chapter 7 bankruptcy if you intend to continue operating your business, whether or not it is a sole proprietorship. This does not mean Chapter 7 can never be done effectively and safely in this situation, but you definitely need the advice of a savvy, experienced, and conscientious attorney with significant business bankruptcy experience to determine whether and how to do so.
If your business is in the form of a sole proprietorship, then Chapter 13 could be your best and safest option for continuing to run your business while solving your debt problems. That could also be true even if the business is a corporation or some other legal entity, but likely only if the business itself has no debts or else its debts are current.
This is definitely a delicate arena, requiring sophisticated legal knowledge and experience. If you have a business that you want to continue operating while resolving your debt problems, and you live in live in New Jersey, please contact us at the Law Office of Andrew B. Finberg. We can provide you a free, no-obligation consultation to make it easier to assess whether you would like us to serve you. Please call us at (856) 988-9055 or use this form to arrange for this consultation or to reach us with any questions. We look forward to serving you.