A business bankruptcy under Chapter 13 is referred to as a wage earner’s bankruptcy. A corporation or a partnership cannot seek business bankruptcy protection under Chapter 13. Self-employed individuals who operate a business or conduct a business in their own name can file for bankruptcy under this Chapter. However, the bankruptcy must be filed in the owner’s name (and not in the business’s name).
The individual’s unsecured debts must be less than $360,475 and his secured debts must be less than $1,081,400. These figures are as on October 2011, and these figures are regularly adjusted based on the consumer price index. Mortgage, car loan, etc., are examples of secured debt – personal unsecured loans, credit card loans, etc., are unsecured debts.
A business can qualify for Chapter 13 bankruptcy only if the individual proves that he has enough income left over (after deducting allowed expenses and priority & secured debt repayments) to repay unsecured debts. The bankruptcy plan must contain a strategy to repay certain debts (example: priority debts) in full. Plus, it must cover all debts, secured and unsecured. Here is how debts are categorized in a business bankruptcy under Chapter 13:
1. Alimony, child support, tax debts, wages, commissions and benefits to employees, contributions owed to employees’ benefit funds are categorized as priority debts. These must be repaid in full.
2. Mortgage and secured debts must be paid in full or the house/asset will be sold by the lender.
3. Every other unsecured debt has to be repaid anywhere between 0% and 100%. The percentage depends on disposable income (income, less priority and secured debts), the market value of nonexempt assets, and the length of the bankruptcy plan.
If the individual’s income is not sufficient to cover all his debts, then the bankruptcy plan may be rejected.
Individuals who file for a business bankruptcy under Chapter 13 can use the following sources of income to repay their business debts:
1. Salary
2. Other income (salaries or commissions from freelance gigs, seasonal employment, 2nd employment, etc.)
3. Pensions
4. Social security benefits
5. Workers’ compensation benefits
6. Any unemployment benefits
7. Welfare payments (benefits)
8. Rents
9. Sale of assets
10. Alimony/Child support
11. Income of spouse
Finally, to qualify for business bankruptcy under Chapter 13, the individual must submit proof that he has filed Federal and state income tax returns up to the last financial year prior to bankruptcy. The individual is required to submit proof of the last 4 years’ filings.
Chapter 13 business bankruptcy is not as simple as it seems and even slight, technical glitches can nullify the process. It’s best to work with a bankruptcy lawyer for any bankruptcy, including Chapter 13 bankruptcy.
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