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Bankruptcy isn’t just for individuals.  Business entities can also benefit from a strategic bankruptcy, ranging from the small, family-owned operation up to the large corporation with thousands of employees.  However, bankruptcy is not a “one-size-fits-all” matter.  On the contrary, there are several different forms of bankruptcy, each designed to fit a different set of goals and needs.  The question is, which type of bankruptcy is right for your company?  And are there any forms of bankruptcy which are completely off-limits for business owners?  Our Philadelphia Chapter 11 bankruptcy attorneys examine various chapters of bankruptcy for Pennsylvania-based companies. 

What is the Difference Between Chapter 13 and Chapter 11 Bankruptcy in PA?

In the United States, most bankruptcies fall into one of the following categories:

  • Chapter 7 Bankruptcy
  • Chapter 11 Bankruptcy
  • Chapter 13 Bankruptcy

Each is named for its corresponding chapter of the U.S. Bankruptcy Code, hence the use of the term.  There is also an additional form of bankruptcy known as Chapter 12 bankruptcy, but these cases are very rare as Chapter 12 is available exclusively to fishermen and farmers.

Most debtors opt to file under Chapter 7 or Chapter 13.  According to court statistics, which you can see pictured below, the United States Bankruptcy Court for the Eastern District of Pennsylvania processed 4,916 Chapter 7 cases during the 2016 fiscal year, compared to 4,357 Chapter 13 cases and just 86 Chapter 11 cases.

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Part of the reason Chapter 13 and Chapter 7 cases outnumber Chapter 11 cases so significantly is that Chapter 11 is restricted to use by businesses, as well as, in rare cases, individuals whose debts exceed the limitations set forth in 11 U.S.C. § 109(e).  Chapter 11 cases also tend to be somewhat lengthy – often taking several years, whereas Chapter 7 generally takes just several months – and are among the most complex types of bankruptcy cases.  These factors can create a sense of hesitation or intimidation in business owners, which is unfortunate, as Chapter 11 bankruptcy can actually be a tremendous benefit to your company, provided you are guided by a diligent and skillful Chapter 11 reorganization bankruptcy attorney.

In some ways, Chapter 13 bankruptcy is similar to Chapter 11.  For instance, both typically take several years to complete.  More significantly, both feature a reorganization plan which serves as a roadmap for filers to make steady, consistent repayments toward their creditors, who, in both forms of bankruptcy, receive priority based on whether they are secured or unsecured.

Can a Corporation, LLC, Sole Proprietorship, or Partnership File for Chapter 13?

Despite their similarities, there are also some substantive differences between Chapter 13 and Chapter 11.  First and foremost, filing under Chapter 13 is prohibited for most businesses, including corporations and limited liability companies.  These types of business entities are effectively required to file under Chapter 11, which makes selecting a type of bankruptcy – if not the actual case itself – rather straightforward.

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A corporation, partnership, or LLC may file for bankruptcy under Chapter 7.  However, its assets will be liquidated, and the business will cease to operate.  Thus, if the filer wishes to avoid this outcome, Chapter 11 becomes the remaining and necessary option.

However, sole proprietorships and certain partnerships have some special considerations due to the unique manner in which they are structured.  For these types of businesses, Chapter 13 may be a suitable alternative to Chapter 11, depending on the details of the case.

It’s essential to understand that Chapter 13 may only be used by individuals, which is why this type of bankruptcy is off-limits for corporations and LLCs.  If the business owner who wishes to declare bankruptcy is a sole proprietor or a partner, he or she may be able to file under Chapter 13 in his or her own name – not in the name of the business – to address debts for which he or she is personally liable.  Of course, in the case of a sole proprietorship, the business owner is treated as the business itself, which means the Chapter 13 bankruptcy will ultimately include the filer’s business debts.

Philadelphia Bankruptcy Lawyer Serving Small Businesses

If you are a business owner in Philadelphia and are thinking about filing for bankruptcy, it is vital that you have the benefit of experienced guidance to help you navigate the process, which can be extremely complex, particularly in cases involving Chapter 11 or Chapter 13.  The renowned team of bankruptcy attorneys at Sadek & Cooper Law Offices assists large, mid-size, and small businesses in Philadelphia, Bucks County, Delaware County, and New Jersey with various forms of bankruptcy, as well as bankruptcy alternatives where appropriate.

To talk about business bankruptcy in a free and confidential legal consultation, contact Sadek & Cooper Law Offices at (215) 995-2543 as soon as possible.  Our Bucks County Chapter 7 bankruptcy lawyers also assist individual filers and married couples who wish to file jointly.