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Should Small Business Owners Choose Chapter 11 or 13 Bankruptcy?

In California, many small businesses are facing increased financial difficulties due to tough economic conditions. For companies facing decreasing profits and large amounts of debt, bankruptcy might be the only option. Under current bankruptcy laws, there are two options for debtors who wish to remain in business — restructuring debt in Chapter 11 or building a payment plan in Chapter 13.

Chapter 11 and Chapter 13 are somewhat similar, as both allow debtors to keep their businesses open and propose a plan to restructure their finances. Both of these options may:

  • Allow you to retain property to keep your business open
  • Give you time to sell your assets you do not need or cannot afford
  • Modify payment terms on debts such as a property mortgage and equipment loans

Yet there are differences between Chapter 11 and Chapter 13. Chapter 11 is optimal for businesses that have a plan for future recovery, as it supports the continuation of the company while under a reorganization plan. Almost anyone can file for bankruptcy under Chapter 11. There are no debt or income requirements for filing, and debtors are also not required to turn over disposable income to the trustee. They are, however, often under increased scrutiny from the court-appointed trustee.

Chapter 13, on the other hand, is only available to those with regular income. Only individuals who are the sole proprietor of the business are eligible to file, and there is also a debt limitation. Under Chapter 13, a repayment plan is filed with the court, detailing how the debt will be repaid. This option is usually only reserved for consumers and debtors are required to turn over all disposable income to the trustee.

Most small business owners tend to choose Chapter 13 over 11. Chapter 11 can be more flexible, but may cost too much and take too much time to complete. For more information and guidance on bankruptcy issues in California and how they relate to your business, speak with a knowledgeable Los Angeles attorney.

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