A business can file for Chapter 13 bankruptcy only if it is a sole proprietorship. Federal law limits Chapter 13 to an “individual with regular income,” so corporations, LLCs, and partnerships are shut out of this chapter entirely.1Office of the Law Revision Counsel. 11 USC 109 – Who May Be a Debtor A sole proprietor qualifies because the owner and the business are legally the same person, which means personal and business debts can go into one court-supervised repayment plan lasting three to five years.
Who Can File Chapter 13 as a Business
The eligibility rule sits in 11 U.S.C. § 109(e), and it draws a hard line at legal form. Corporations, LLCs, and partnerships are treated as legal persons separate from their owners, and none of them can be a Chapter 13 debtor. Those entities have to look at Chapter 11 instead.
A sole proprietorship is different because it has no separate legal identity. The vendor invoices, the equipment loan, the shop lease, the credit cards used for inventory — all of it belongs to the individual owner. When that owner files Chapter 13, both sides of the ledger come along.
Spouse-run businesses are the common gray area. If one spouse owns the business and the other is an employee, it stays a sole proprietorship and Chapter 13 is available. If the two run it together as partners, even under an unwritten agreement, the arrangement is a partnership, and the partnership itself cannot use Chapter 13.2Office of the Law Revision Counsel. 11 USC 109 – Who May Be a Debtor
What LLCs, Corporations, and Partnerships Can Do Instead
Business entities barred from Chapter 13 have a close cousin available: Subchapter V of Chapter 11, created by the Small Business Reorganization Act. Subchapter V works much like Chapter 13. The business proposes a repayment plan, keeps operating, and avoids the cost and complexity of a full Chapter 11. Total debts have to be below the adjusted threshold, which is roughly $3.4 million as of the most recent adjustment.3U.S. Department of Justice. Subchapter V Small Business Reorganizations A sole proprietor whose debts are too high for Chapter 13 can also use Subchapter V.
Debt Limits That Can Still Disqualify a Sole Proprietor
Even if you qualify as an individual, Chapter 13 caps the debt you can bring in. A temporary law had raised the ceiling to $2,750,000 in combined debt, but that provision expired in June 2024 and the two-part test has returned. As of April 2025, the adjusted figures are:
- Unsecured debts under $526,700 (credit card balances, medical bills, unpaid vendor invoices without collateral)
- Secured debts under $1,580,125 (mortgages, vehicle loans, equipment loans backed by collateral)
The limits apply to debts that are fixed in amount and not subject to dispute, and they are adjusted every three years.4Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases Go over either ceiling and Chapter 13 is off the table; Chapter 11 or Subchapter V is where you end up.
Income and the Repayment Plan
Chapter 13 requires “regular income” — money coming in on a predictable, recurring basis. For a sole proprietor, that means the business has to generate enough steady revenue to fund plan payments for years. A seasonal operation with erratic cash flow can have trouble clearing this bar, because the court reviews recent earnings history to decide whether the income is reliable enough.
Plan length turns on how your income compares to the state median. Below the median, the plan can run as short as three years. Above it, the plan generally has to run five.5Cornell Law School. Chapter 13 Plan
The monthly payment is built from your “disposable income.” The court starts with gross income and subtracts reasonable living expenses along with ordinary business operating expenses. Rent for the shop, inventory purchases, employee wages, and utilities all come off before the payment is calculated.6United States Courts. Chapter 13 – Bankruptcy Basics What is left is what creditors get.
Cramming Down Business Assets
One of the practical reasons a sole proprietor chooses Chapter 13 is the cramdown. If you owe more on a piece of business equipment than it is currently worth, the plan can treat the secured claim at the collateral’s fair market value and reclassify the rest as unsecured debt, which usually gets paid only partially. A $20,000 balance on equipment worth $12,000 becomes a $12,000 secured claim plus $8,000 in unsecured debt.
Timing rules apply. A vehicle loan can be crammed down only if you bought the vehicle at least 910 days (about two and a half years) before filing. For other personal property, including business equipment, tools, and inventory, the purchase has to be at least a year old. The mortgage on your primary residence cannot be crammed down at all, although a wholly unsecured junior lien may sometimes be stripped off if the first mortgage exceeds the home’s value.7Office of the Law Revision Counsel. 11 USC 1325 – Confirmation of Plan
Ongoing Reporting While the Case Is Open
Sole proprietors carry reporting duties that wage earners do not. Expect to file periodic operating reports covering business income, expenses, unpaid bills incurred since filing, accounts receivable, and bank statements. Internal income statements and balance sheets are typically attached. The trustee uses these to see whether the business can keep sustaining the plan.
Filing and the Automatic Stay
The petition goes to the bankruptcy court clerk in your federal district. The filing fee is $313 and can be paid in installments. The court appoints a Chapter 13 trustee to review your plan, monitor payments, and distribute funds to creditors.8Office of the Law Revision Counsel. 11 USC 1302 – Trustee Attorney fees vary by district and generally run about $3,000 to $5,000, with many courts using a presumptively reasonable “no-look” fee. Self-employed cases can cost more.
Before filing, you must complete a credit counseling course from an approved agency and file the certificate with the petition. Skip it and the case gets dismissed.9United States Courts. Credit Counseling and Debtor Education Courses
Once you file, the automatic stay stops creditors from collecting, filing lawsuits, repossessing equipment, or foreclosing on property.10Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay For a sole proprietor, that breathing room can be what keeps the business open.
The stay has a limit worth knowing. If someone co-signed a personal debt for you, the stay protects them from collection on that consumer debt while your case is open. It does not protect anyone who co-signed a business debt. A partner or family member on a business loan or line of credit can still be pursued while your Chapter 13 case is pending.11Office of the Law Revision Counsel. 11 USC Chapter 13 – Adjustment of Debts of an Individual With Regular Income
Discharge and What Survives It
After you finish every plan payment and complete a post-filing debtor education course, the court enters a discharge that releases you from personal liability on most debts covered by the plan.9United States Courts. Credit Counseling and Debtor Education Courses
Some debts survive:
- Long-term obligations with payment schedules extending past the plan, like a home mortgage
- Priority tax debts that were required to be paid in full under the plan but were not fully paid
- Child support and alimony
- Most government-funded or guaranteed student loans
- Criminal fines and restitution
Fraud-based debts can also survive, but only if the creditor files a timely action and proves the fraud. Absent that challenge, the debt is discharged with everything else. This is broader than Chapter 7, which excludes fraud debts automatically.12Office of the Law Revision Counsel. 11 USC 1328 – Discharge
Debt wiped out through a completed Chapter 13 plan is not treated as taxable income.13Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not? The tradeoff is a possible reduction in tax attributes such as net operating losses, capital loss carryovers, or the basis of business property, which you report on IRS Form 982 for the year the discharge occurs.14Internal Revenue Service. Instructions for Form 982
If the Plan Fails
Business income can drop. If you cannot keep up with plan payments, you have three ways out: modify the plan, convert to Chapter 7, or let the case be dismissed.
Modification means asking the court to adjust the payment amount or extend the timeline within the three-to-five-year window. Conversion to Chapter 7 shifts the case from reorganization to liquidation, and a Chapter 7 trustee takes control of non-exempt business equipment, inventory, and receivables to sell them for creditors. For a sole proprietor, that usually means the business closes.
Dismissal lifts the automatic stay and lets creditors pick up collection where they left off. Payments already made through the plan stay with the creditors who received them, but remaining debts come back in full. If circumstances truly outside your control block you from finishing the plan, the court may grant a hardship discharge, which covers fewer debts and requires that creditors have already received at least what they would have gotten in a Chapter 7 liquidation.12Office of the Law Revision Counsel. 11 USC 1328 – Discharge