Facing financial problems as a business owner in the Durham-Chapel Hill area is incredibly stressful. You likely feel overwhelmed by your company’s debts and the uncertainty about its future. The first critical step is understanding your specific bankruptcy options.
Since the decision hinges on your business structure and goals, understanding the differences between Chapter 7 and Chapter 11 is crucial; Chapter 13 is available to individuals, such as sole proprietors, who have regular income and meet specific debt limits.
Chapter 7 liquidation
Corporations and LLCs may file for Chapter 7 to formally close their operations and liquidate assets. Still, only individual debtors (sole proprietors) receive a discharge of their debts, providing them with a “fresh start.”
- It is generally the quickest and least expensive way to resolve eligible debt.
- The court appoints a trustee to sell your nonexempt assets.
- This process provides a final discharge of most qualifying debts for individual debtors (sole proprietors).
- Corporations and LLCs are liquidated but do not receive a discharge even though they cease operations.
The biggest drawback is that the business must stop operating. The trustee sells nonexempt assets to repay your creditors.
Chapter 11 reorganization
Chapter 11 allows fundamentally sound and income-generating businesses to restructure their significant debts and survive. This option is available to corporations, LLCs, and partnerships.
Recent reforms, especially Subchapter V, have made Chapter 11 much more accessible for certain small businesses by streamlining the process. However, eligibility is currently limited to companies with combined secured and unsecured debts of no more than $3,424,000, as of April 1, 2025.
- You, the owner, remain in control, keeping your business open and operating.
- You gain time to develop a comprehensive repayment plan that renegotiates debts and contracts.
- Subchapter V simplifies the process, reducing the historical complexity, cost and lengthy timeline of a standard Chapter 11.
You become the “debtor in possession,” which means you run the business while creating your plan. This path gives your company a vital second chance to succeed.
Chapter 13 for sole proprietors
If you operate as a sole proprietor, your business and personal debts often overlap. Chapter 13, which is available to individuals with regular income (including self-employed sole proprietors), offers a way to reorganize your finances. It is the perfect choice when you want to protect essential business assets.
- This chapter lets you keep your business and most of your assets.
- You pay your debts over a manageable three- to five-year repayment plan.
- You protect your personal property while addressing business debts.
This option is only available to individuals and has specific limits on the amount of secured and unsecured debt you can have (currently $1,580,125 for secured debt and $526,700 for unsecured debt). You must have a regular income to propose a workable payment plan.
Choosing your next steps
Selecting the correct bankruptcy chapter is a high-stakes decision. You must carefully evaluate all liabilities, assets and your company’s future viability. A skilled bankruptcy attorney can explain each option to ensure your chosen solution aligns with your long-term personal and financial objectives.
