Bankruptcy law in Florida gives debtors as well as business owners a legal way out of debt. Chapter 7 and Chapter 13 bankruptcy are two common options, but they don’t work the same way. Since each situation differs, a business owner may qualify for one type over the other. It helps to understand how each type works.
Chapter 7 bankruptcy
Chapter 7 bankruptcy involves the liquidation of assets to pay debts. A trustee manages the sale of non-exempt assets and divides the proceeds among creditors. In some states, exempt assets may include tools used for a business up to a certain value, and non-exempt assets could include bank accounts, stocks and shares.
The business owner may lose their business, but they erase all non-exempt debts. Some secured debts commonly cannot be erased in bankruptcy, such as tax liens. The owner may also have to cease operation.
Chapter 13 bankruptcy
Chapter 13 bankruptcy restructures debt into a manageable payment plan approved by the court. The trustee assigned to the case will compile all the income and assets to devise a manageable plan to pay a portion of debts. It doesn’t require the owner to sell assets. The owner commonly has three to five years to pay debts.
However, a business owner will have to file for Chapter 13 individually and qualify for it, which keeps their business credit in good standing. A debtor who qualifies for Chapter 13 commonly has a large debt-to-income ratio and can no longer manage to pay debts. They also need to have some disposable income. A small business owner needs to have enough income to pay the debt.
Filing bankruptcy requires some careful consideration, but trying to keep the business in operation during this time can be detrimental. A bankruptcy attorney may be able to help a business owner decide on the best possible option.