If you’re a business owner struggling with debt, bankruptcy may seem like the end of your journey. However, in reality, it could be the start of a new chapter in your financial life. The question is which type of bankruptcy will work best for you. At Duncan Bankruptcy Law in Augusta, Georgia, we have helped thousands of clients make this decision. And the answer is not always straightforward.
Understanding the Basics: Chapter 7 vs. Chapter 13
Before we dive into what works best for business owners, let’s take a look at each chapter to see what it’s actually about.
Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” is a process in which a court-appointed trustee oversees the sale of your assets to pay off creditors. The trustee will liquidate non-exempt property and discharge most remaining debt, typically within four to six months. This process is fast, efficient, and provides a clean slate for the future.
Chapter 13 bankruptcy is a reorganization plan that involves proposing a structured repayment plan over three to five years. This plan allows you to pay back a portion of the debt while potentially discharging the remaining balance. This process is more complex than Chapter 7, but it provides powerful protections that are not available through Chapter 7.
What Business Owners Need to Know About Chapter 7
For sole proprietors, meaning you and your business are legally the same, Chapter 7 bankruptcy can eliminate personal liability for business debts. This means that credit cards, personal loans used for business purposes, and medical bills can be discharged under 11 U.S.C. § 727. Eligible individuals receive a discharge of most unsecured debts under this section of the law.
However, Chapter 7 has some real limitations for business owners. To qualify, you need to pass the means test. This test compares your average monthly income over the past six months to Georgia’s median household income. If your business generates consistent revenue, you may not qualify.
There’s also the issue of business assets. A trustee may liquidate business equipment, inventory, and receivables to pay creditors, potentially shutting down your business entirely. While Georgia does provide some exemptions, they may not be enough to protect all of your business property.
Why Chapter 13 Often Protects Business Owners Better
For many business owners, Chapter 13 bankruptcy is a stronger shield. This is because:
You Keep Your Business Running
Unlike Chapter 7, Chapter 13 does not involve liquidation of your assets. Instead, you continue to operate your business during the repayment period, generating income that can be used to fund the repayment plan.
You Can Catch Up on Secured Debts
Falling behind on your mortgage or equipment payments doesn’t necessarily mean losing your assets. Under 11 U.S.C. § 1322, a Chapter 13 bankruptcy plan allows you to catch up on missed payments and restructure your secured debt over time.
Broader Discharge Capabilities
Chapter 13 provides for the discharge of certain debts that are not covered by Chapter 7, including some tax obligations and debts arising from property settlements. Under 11 U.S.C. § 1328, “superdischarge”, offered by Chapter 13, offers protections that are not available under Chapter 7.
Stopping Foreclosures and Garnishments
The automatic stay, which begins immediately after filing, prevents foreclosures, repossessions, and wage garnishments. In Georgia, wages that have been garnished may even be recovered if you file promptly.
Repay Only What You Can Afford
Your monthly payment under the plan is based on your disposable income, rather than the full amount you owe. In some cases, unsecured creditors may receive as little as one percent of the amount owed, with the remainder being discharged at the end of the payment plan.
Which Chapter Is Right for You?
The answer depends on various factors, such as your income, the type of debts you have, whether you wish to continue your business, and the assets you want to protect. If you are a business owner who wants a fresh start but can no longer support operations, chapter 7 bankruptcy may be more suitable for you. On the other hand, if you want to continue operating your business while managing significant debt, chapter 13 bankruptcy might be a better option.
Talk to an Augusta Bankruptcy Attorney Today
At Duncan Bankruptcy Law, P.C., we have handled over 10,000 cases and specialize in Chapters 7 and 13 bankruptcy proceedings, as well as student loan issues. This allows us to provide you with focused and experienced counsel each time. Whether you are trying to protect a business you have built from scratch or simply trying to stop the financial bleeding, we are here to help you find the best course of action.
Contact us today for a free consultation.
