Does a Trustee Take Over the Business of the Debtor in a Chapter 13?

by Tom Streissguth
A small business can keep its doors open during a Chapter 13 bankruptcy.

A small business can keep its doors open during a Chapter 13 bankruptcy.

Felipe Dupouy/Photodisc/Getty Images

Owning a business is no protection against financial troubles. If you are a sole proprietor, a Chapter 13 bankruptcy allows for some court-ordered protection from creditors. A court trustee looks at your disposable income, draws up a repayment plan, takes the payments and works with your creditors. A Chapter 13 case may allow you to discharge your debts, including business loans, even though you are personally liable for them.

Business Bankruptcy

Only individuals may file for Chapter 13 bankruptcy protection, which is not available to corporations, partnerships or limited liability companies. For these entities, the appropriate bankruptcy for the business would be a Chapter 11. Under bankruptcy law, a business in Chapter 13 is one in which the debtor has regular income, is self-employed and incurs trade credit -- essentially debt, such as a business loan or a delivery of goods or raw materials on credit terms.

Limits on Chapter 13 Filings

When a sole proprietor files a Chapter 13 bankruptcy, the court considers the assets, liabilities, and income of the individual and the business together -- just as the IRS does. To qualify for a Chapter 13, your unsecured debts must be less than $383,175, and secured debts must amount to less than $1,149,525, as of May 2014. Chapter 13 bankruptcy rules allow you to continue to operate your business, change payment terms on loans, or repay a portion of your debts and then have the court discharge them altogether.

Trustee Role

A Chapter 13 bankruptcy is only available to individuals who have disposable income, either from a job or a sole proprietorship. The court will appoint a trustee to supervise your financial affairs but who does not seize control of the business, directly manage the business, hire or fire employees, or deal directly with clients and customers. A sole proprietor under Chapter 13 bankruptcy continues to make decisions about selling and leasing goods, entering into new contracts, and marketing. You must notify the trustee of any new credit arrangements or loans that are not part of the ordinary course of business, which are subject to court approval.

The Repayment Plan

The Chapter 13 trustee draws up a repayment plan for your debts, taking into consideration your disposable income, defined as the earnings over and above money needed for essential living costs. You repay your creditors for both personal and business loans a percentage of the debts over a period of three to five years. A sole proprietor also must repay past-due taxes, as well as non-dischargeable debts that a bankruptcy doesn't eliminate, such as child support and government-backed student loans. At the end of the repayment plan, the court discharges debts that the law allows to be discharged, as long as you have made all payments to the plan and are current on your non-dischargeable debts.