Can a Business File Chapter 13? Understanding Your Bankruptcy Options

If you’ve been Googling “can a business file Chapter 13?” at 2 AM, you’re not alone. Many small business owners face this confusing situation, and the answer isn’t as straightforward as you might hope. Let’s break down everything you need to know about Chapter 13 bankruptcy, who can file, and what options exist for your struggling business.

The Short Answer: It Depends on Your Business Structure

Here’s the deal—Chapter 13 bankruptcy is designed exclusively for individuals, not businesses. But wait, there’s a twist. If you’re a sole proprietor, you can file Chapter 13 because legally, you and your business are the same entity. Your business debts are your personal debts, and vice versa.

Corporations and LLCs? Sorry, you’re out of luck with Chapter 13. These business structures are considered separate legal entities from their owners, which means they can’t use Chapter 13 bankruptcy protection.

Who Can Actually File Chapter 13?

• Sole proprietors: Yes, absolutely
• Independent contractors: Yes
• Freelancers: Yes
• Partnerships: No
• LLCs: No
• Corporations (S-Corp, C-Corp): No

The distinction matters because it determines your entire bankruptcy strategy and what happens to your business during the process.

Understanding Chapter 13 Bankruptcy Basics

Chapter 13 bankruptcy is often called a “wage earner’s plan” because it allows individuals with regular income to develop a plan to repay all or part of their debts over three to five years. Think of it as a court-supervised payment plan that gives you breathing room while you get back on your feet.

During Chapter 13, you make monthly payments to a bankruptcy trustee who then distributes the money to your creditors according to a court-approved repayment plan. The beauty of this approach is that it can stop foreclosures, repossessions, and wage garnishments—giving you time to catch up on missed payments.

Key Features of Chapter 13

Payment Duration: Plans typically last 3-5 years depending on your income level and the amount you owe.

Debt Limits: As of 2025, you must have less than $2.9 million in combined secured and unsecured debts to qualify. This is actually a pretty generous limit that was recently increased to help more small business owners.

Income Requirement: You need regular income to make monthly payments. If you can’t demonstrate steady income, Chapter 13 won’t work for you.

Asset Protection: Unlike Chapter 7 bankruptcy, which might require you to liquidate assets, Chapter 13 lets you keep your property while you repay debts.

Sole Proprietors and Chapter 13: What You Need to Know

If you run your business as a sole proprietorship, you can include both your personal and business debts in a Chapter 13 filing. This means credit card debt, business loans, equipment leases, unpaid invoices, supplier debts, and even personal expenses like your mortgage can all be wrapped into one repayment plan.

The process starts with filing a petition with the bankruptcy court, which includes detailed information about your income, expenses, debts, and assets. You’ll also propose a repayment plan showing how much you can afford to pay your creditors each month.

Can You Keep Your Business Running?

Yes! One of the biggest advantages of Chapter 13 for sole proprietors is that you can continue operating your business throughout the bankruptcy process. You’re not forced to shut down or liquidate. However, you’ll need court approval for major business decisions like taking on new debt, selling assets, or making large purchases.

This continuation of business operations is crucial because it allows you to generate the income needed to fund your repayment plan. Without revenue coming in, you can’t make those monthly payments to the trustee.

What If You’re Not a Sole Proprietor?

If your business is structured as an LLC or corporation, Chapter 13 is off the table. But don’t panic—you have other options that might actually work better for your situation.

Chapter 11 Bankruptcy for Businesses

Chapter 11 is the business reorganization bankruptcy that allows corporations and LLCs to restructure their debts while continuing operations. It’s more complex and expensive than Chapter 13, but it’s designed specifically for businesses.

Under Chapter 11, you create a reorganization plan that shows how you’ll operate your business and repay creditors going forward. The business remains in control (called “debtor in possession”) unless the court appoints a trustee. This is the bankruptcy route used by major companies you’ve heard about—from airlines to retail chains—when they need to restructure.

The downside? Chapter 11 is expensive. Legal fees alone can run tens of thousands of dollars, and the process is much more involved than Chapter 13.

Chapter 7 Bankruptcy: The Liquidation Option

If your business can’t be saved and you want to close it down, Chapter 7 bankruptcy might be appropriate. This involves liquidating business assets to pay creditors and then closing the doors for good. It’s the end of the road for the business entity, but it can provide a clean break.

For sole proprietors, you can also file Chapter 7 personally, which would discharge both personal and business debts (with some exceptions). This might be the right choice if your business is beyond recovery and you want to eliminate debt quickly rather than commit to a multi-year repayment plan.

Informal Debt Negotiation

Before jumping into bankruptcy, consider negotiating directly with creditors. Many creditors would rather work out a payment arrangement than get pennies on the dollar through bankruptcy proceedings. This is especially true for smaller debts where the creditor wants to maintain the business relationship.

Reaching out to a financial advisor for debt management can help you navigate these negotiations and potentially avoid bankruptcy altogether.

The Debt Limit Question

The $2.9 million debt limit for Chapter 13 is a combined figure that includes both secured debts (like mortgages and car loans) and unsecured debts (like credit cards and medical bills). If you exceed this limit, you’ll need to consider Chapter 11 instead, even if you’re a sole proprietor.

Secured debts are loans backed by collateral—if you don’t pay, the lender can take the property. Unsecured debts have no collateral backing them, so the lender can’t automatically seize any specific property if you default.

Here’s a comparison of common debt types:

The Impact on Your Personal Credit

Here’s something many business owners don’t fully grasp: if you’re a sole proprietor filing Chapter 13, it will absolutely impact your personal credit. The bankruptcy will appear on your credit report and remain there for seven years from the filing date.

Your credit score will take a significant hit—typically dropping 130-200 points. But here’s the silver lining: because you’re in a structured repayment plan and making regular payments, your credit can start recovering before the bankruptcy is even discharged. Many people see their scores improve within a couple of years if they manage their remaining credit responsibly.

For corporations and LLCs filing business bankruptcy, the impact on personal credit depends on whether you personally guaranteed any business debts. If you did, those guarantees mean creditors can come after you personally, and any debt collection efforts will affect your personal credit.

Understanding the Chapter 13 Process

Let’s walk through what actually happens when a sole proprietor files Chapter 13. The process typically takes 4-6 months from filing to plan confirmation, though you’ll start making payments to the trustee within 30 days of filing.

Step 1: File the Petition
You submit your bankruptcy petition, schedules of assets and liabilities, a schedule of current income and expenditures, and your proposed repayment plan. There’s a filing fee (currently $313), though you may be able to pay in installments.

Step 2: Automatic Stay Goes Into Effect
As soon as you file, an “automatic stay” stops most collection actions against you. Creditors must stop calling, lawsuits are paused, and foreclosures are halted. This immediate relief is one of the biggest benefits of filing.

Step 3: Meeting of Creditors
About 20-40 days after filing, you’ll attend a meeting where the trustee and any creditors who show up can ask you questions under oath about your finances and repayment plan. Most creditors don’t attend these meetings.

Step 4: Confirmation Hearing
The bankruptcy court holds a hearing to review and approve your repayment plan. Creditors can object if they think the plan is unfair or if you’re not proposing to pay enough. The judge will decide whether to confirm the plan.

Step 5: Make Payments
Once your plan is confirmed, you make monthly payments to the trustee for 3-5 years. The trustee distributes the money to creditors according to the plan terms.

Step 6: Discharge
After completing all plan payments, you receive a discharge of remaining unsecured debts. Congratulations—you’ve successfully navigated Chapter 13!

What Debts Can Be Included or Discharged?

Not all debts are treated equally in Chapter 13. Priority debts must be paid in full through your plan, while other debts might be partially discharged after you complete your payments.

Priority Debts (Must Pay in Full):

• Recent taxes (typically last 3 years)
• Child support and alimony
• Wages owed to employees

General Unsecured Debts (May Be Partially Discharged):

• Credit card balances
• Medical bills
• Personal loans
• Business supplier debts

Non-Dischargeable Debts:

• Student loans (except in rare hardship cases)
• Recent taxes with fraud or evasion
• Debts from willful or malicious injury
• Some types of fines and penalties

Understanding which debts fall into which category helps you set realistic expectations about how much relief Chapter 13 will actually provide. If most of your debt is non-dischargeable, bankruptcy might not be your best solution.

Alternatives Worth Considering

Before committing to bankruptcy, explore other debt relief programs that might work for your situation. Sometimes a combination approach works better than going all-in on bankruptcy.

Debt Consolidation

Consolidating debt involves taking out a single loan to pay off multiple debts, leaving you with one monthly payment at hopefully a lower interest rate. This can simplify your finances and potentially save money on interest, but it requires decent credit to qualify for good terms.

Debt Settlement

Debt settlement involves negotiating with creditors to accept less than what you owe in exchange for a lump-sum payment. While this can significantly reduce your total debt, it severely damages your credit and settled debts may be taxable income.

Credit Counseling

Working with a credit counseling service can help you create a debt management plan without filing bankruptcy. These agencies negotiate with creditors on your behalf to reduce interest rates and create a manageable payment schedule. The advantage is that it’s less damaging to your credit than bankruptcy.

Do You Need a Bankruptcy Attorney?

Technically, you can file Chapter 13 bankruptcy without an attorney, but it’s rarely a good idea. The process is legally complex, and making mistakes can result in your case being dismissed or your repayment plan rejected.

A bankruptcy attorney can help ensure you’re actually eligible for Chapter 13, maximize the debts that get discharged, protect your assets through proper planning, and navigate objections from creditors. Given that your financial future is on the line, professional legal guidance is usually worth the investment.

Most bankruptcy attorneys offer free initial consultations where they can evaluate your situation and explain your options. Many also offer payment plans since they understand you’re financially stressed.

Making the Decision

Deciding whether to file bankruptcy—and which chapter to file—is one of the most significant financial decisions you’ll ever make. It’s not something to rush into without fully understanding the consequences and alternatives.

Consider these questions:

• Can you realistically pay off your debts within 3-5 years with a structured plan?
• Will continuing your business generate enough income to fund a repayment plan?
• Are your debts primarily dischargeable, or are they the type that bankruptcy won’t eliminate?
• Have you explored all alternatives to bankruptcy?
• Is your business structure eligible for Chapter 13?

If you’re a sole proprietor struggling with business debts, Chapter 13 might provide the breathing room you need to get back on track. If you’re running an LLC or corporation, you’ll need to look at Chapter 11 or potentially closing the business through Chapter 7.

Common Pitfalls to Avoid

Many business owners make critical mistakes when considering or filing Chapter 13. Here are some to watch out for:

Waiting Too Long: Don’t wait until you’ve exhausted all your resources and drained your retirement accounts. Filing earlier, when you still have some assets and income, gives you more options and a better chance of successful reorganization.

Hiding Assets: Bankruptcy fraud is a federal crime. Being dishonest about what you own or how much you earn will get your case dismissed and could land you in serious legal trouble.

Running Up Debt Before Filing: Taking on new debt right before filing bankruptcy looks suspicious and those debts likely won’t be discharged. Courts assume you didn’t intend to repay them.

Not Following the Payment Plan: Missing payments to your trustee can result in your case being dismissed, leaving you worse off than when you started. Make those payments a top priority.

Taking on New Debt Without Permission: While in Chapter 13, you need court approval to take on significant new debt. Going around this requirement can jeopardize your case.

Life After Chapter 13

Completing a Chapter 13 repayment plan is a significant accomplishment. You’ve demonstrated commitment to repaying your debts and you emerge with a fresh financial start. While the bankruptcy remains on your credit report for seven years, the impact lessens over time, especially if you build positive credit history.

Many people find that their credit scores improve steadily during and after Chapter 13, particularly if they avoid debt going forward and make all payments on time. You can start rebuilding by getting a secured credit card, keeping your credit utilization low, and paying every bill on time.

Your business can also thrive post-bankruptcy. With your debts under control or discharged, you have breathing room to focus on operations and growth rather than constantly juggling creditors. Many successful businesses have gone through bankruptcy and come out stronger on the other side.

Final Thoughts

So, can a business file Chapter 13? If you’re asking this question, the answer depends entirely on your business structure. Sole proprietors can file Chapter 13 as individuals and include their business debts. Corporations and LLCs cannot file Chapter 13—they need to explore Chapter 11, Chapter 7, or alternatives to bankruptcy.

The decision to file bankruptcy shouldn’t be made lightly, but it’s also not something to be ashamed of. It’s a legal tool designed to give honest people and businesses a second chance when they’re overwhelmed by debt they can’t repay. If you’re drowning in business debt and can’t see a way out, consulting with a bankruptcy attorney is a smart first step.

Remember that bankruptcy isn’t the only option—debt negotiation, consolidation, and working with creditors directly might provide the relief you need without the long-term credit consequences. Whatever path you choose, taking action is better than letting the situation spiral further out of control.

If you found this guide helpful and want to learn more about managing business and personal finances, explore more resources at Wealthopedia for expert guidance on debt, savings, loans, and financial planning.