A Guide to Chapter 7 vs. Chapter 13 Bankruptcy and Keeping Your Business Alive

A Guide to Chapter 7 vs. Chapter 13
A Guide to Chapter 7 vs. Chapter 13

The topic of bankruptcy often brings up images of failure and the end of a dream. But what if we flipped the script? Could bankruptcy actually be a way to save a business and provide a second chance at success? It sounds counterintuitive, but the truth is, declaring bankruptcy might be a strategic move that can help you keep your business afloat. Let’s take a look at how bankruptcy can serve as a survival strategy for small businesses and what you need to consider before taking that route with a bankruptcy attorney in Virginia.

Bankruptcy As a Survival Strategy for Small Businesses

When you think of bankruptcy, you probably think of it as a last resort. That’s understandable. But for small businesses, bankruptcy can actually be a way to reorganize debts, gain some breathing room, and continue operations. Declaring bankruptcy can offer you the time to restructure your business plan, renegotiate contracts, and resolve financial issues without the constant pressure of creditors breathing down your neck.

Chapter 13: A Brief Overview

Chapter 13 bankruptcy is a common choice for small business owners. It allows you to create a repayment plan to pay back your debts over a period of time, usually 3 to 5 years. The benefit here is that your business can continue running while you’re making payments. This means you can still generate income, keep your employees, and possibly even grow during this period.

Considerations for Declaring Chapter 13 Bankruptcy for Your Business


Not every business can file for Chapter 13. It’s mainly for sole proprietors, as corporations and partnerships don’t usually qualify. Also, there are debt limits

Costs and Legal Procedures

Filing for bankruptcy isn’t free or easy. There are court fees, attorney fees, and the time you’ll spend in financial and legal meetings. Make sure you weigh these against the potential benefits.


In order to qualify for Chapter 13, your business needs to be generating enough income to meet the repayment requirements. Simply put, if you can’t demonstrate that your business can be profitable in the near future, then Chapter 13 may not be the right option. You’ll need to show that you can cover both your current operational costs and your repayment plan.

Personal Liability for Business Debts

For sole proprietors, business finances often mix with personal finances. Chapter 13 will likely involve your personal assets because, legally, you and your business are considered the same entity. This means your personal credit score will be affected, and your personal assets might be at risk. Make sure you’re willing to accept these terms.

Realistic Decision-Making

Look, no one wants to declare bankruptcy. But sometimes it’s the best option. The key is to make a realistic assessment of your business. Can it survive and thrive after the restructuring? Are you willing to adapt your business model or pivot entirely? Make sure to consult with financial and legal advisors to get a clear picture of what your business landscape could look like post-bankruptcy.

Business Assets vs. Liabilities

One of the first steps in the process is taking stock of your assets and liabilities. This is not just an accounting exercise; it will help you and the court determine whether your business is salvageable. High-value assets might need to be sold to satisfy debts. On the flip side, identifying your most burdensome liabilities might show you where restructuring could make the most significant impact.

Why Chapter 7 Usually Leads to Closed Businesses

Chapter 7 bankruptcy is commonly referred to as “liquidation” bankruptcy. Unlike Chapter 13 bankruptcy, which allows for reorganization and repayment of debts, Chapter 7 involves selling off your assets to pay off creditors. For this reason, it’s generally not the best option for businesses that want to continue operations. Once assets are sold off, there may be nothing left to continue the business, effectively leading to its closure. If you’re hoping to keep your business open, Chapter 7 usually isn’t the way to go.

Can Creditors Force a Business Into Involuntary Bankruptcy?

The short answer is yes, creditors can push a business into involuntary bankruptcy, but there are conditions. Typically, it’s a move creditors consider if they believe it’s the only way to get some or all of their money back. However, forcing a business into bankruptcy requires a legal process and usually the agreement of multiple creditors. Involuntary bankruptcy can be filed under Chapter 7 or Chapter 11, but not Chapter 13. It’s rare but possible, so if you’re in significant debt and unable to make any payments, be aware of this risk.

File Chapter 7 Bankruptcy and Continue a Sole Proprietorship Service Business

In specific cases, a sole proprietor could file for Chapter 7 and still continue operating their service-based business. This usually works for businesses that don’t have significant assets to liquidate and are primarily based on the individual’s skills or services, such as consulting or freelance work. The business itself doesn’t continue in the same legal form, but the individual can often start anew after the bankruptcy process is over. But tread carefully; the details are intricate and involve legal nuances best navigated with professional advice.

Chapter 7 vs. Chapter 13 Bankruptcy

When comparing Chapter 7 and Chapter 13, the main difference is liquidation vs. reorganization. Chapter 7 wipes out most of your debts but at the cost of selling off assets and usually closing the business. Chapter 13, on the other hand, allows you to reorganize your debts and pay them off over time. If you’re looking to keep your business open, Chapter 13 is generally the more suitable option.

Keep a Business Open by Reorganizing Debts Under Chapter 13 Bankruptcy

Chapter 13 offers the advantage of letting you keep your assets and continue running your business while you repay debts. This can be particularly helpful for businesses hit by temporary setbacks but have a solid foundation for future success. You get a chance to renegotiate contracts, restructure debts, and maybe even reduce some of your obligations. If done right, Chapter 13 can serve as a lifesaver, allowing your business to emerge stronger and more resilient.

Why You Need a Bankruptcy Attorney in Virginia for Your Business

Specific rules and regulations govern bankruptcy, and these can differ from state to state. In Virginia, for example, the state has its own set of exemptions and laws that you’ll need to consider. An experienced bankruptcy attorney can guide you through the complex legal landscape, helping you make the best choices for your unique situation. From filing paperwork correctly to representing you in court, having an experienced attorney can make the bankruptcy process less daunting and more efficient.

Contact the Law Offices of Robert S. Brandt to Request a Consultation

When you’re facing the complex world of bankruptcy, it’s essential to have skilled legal guidance. The Law Offices of Robert S. Brandt specializes in business bankruptcy cases in Virginia and can help you navigate this challenging period. With expertise in both Chapter 7 and Chapter 13, we offer consultations to discuss your options and create a strategy for your business. Don’t go through this process alone; reach out to request a consultation and take the first step toward resolving your financial difficulties.

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