A business can file Chapter 13 bankruptcy only if it is a sole proprietorship. The bankruptcy code restricts this chapter to “an individual with regular income,” which rules out corporations, LLCs, and partnerships entirely.1Office of the Law Revision Counsel. 11 U.S.C. 109 – Who May Be a Debtor A sole proprietor qualifies because the owner and the business are the same legal person, so personal and business debts fold into a single three-to-five-year repayment plan. Even then, the owner must fit under the current debt caps of $526,700 in unsecured debt and $1,580,125 in secured debt.
Why Most Business Structures Are Excluded
Chapter 13 was written for people, not companies. A corporation, LLC, or partnership is a separate legal entity from its owners under state law, so it does not meet the “individual” requirement, and a petition filed in the entity’s name will be dismissed.1Office of the Law Revision Counsel. 11 U.S.C. 109 – Who May Be a Debtor
The mechanics of the chapter explain the limit. Chapter 13 collects a portion of a debtor’s future income and pays it out to creditors through a court-appointed trustee. That framework assumes one human debtor with an identifiable income stream, not an entity with multiple owners, an equity structure, and creditors of different classes. Businesses that need to keep operating while restructuring have to look at Chapter 11 instead.
How Chapter 13 Works for a Sole Proprietor
A sole proprietorship has no legal existence apart from its owner. The IRS taxes the business income on the owner’s personal return, and creditors can already reach the owner’s personal assets to satisfy business debts. Chapter 13 treats the whole picture as one case: personal credit cards, the mortgage, unpaid vendor invoices, equipment loans, and back taxes from the business all go into the same petition.
Filing triggers an automatic stay that immediately stops collection activity, lawsuits, and foreclosures against the owner.2Office of the Law Revision Counsel. 11 U.S.C. 362 – Automatic Stay The stay covers both personal property and business assets such as equipment, inventory, and vehicles used in the trade, which lets the owner keep the doors open while a plan is negotiated. To confirm a plan, the court needs to see that combined personal and business income is stable enough to fund monthly payments.
Monthly Operating Reports
A sole proprietor who keeps running the business during the case has reporting obligations that wage earners do not. Most courts require monthly operating reports showing gross business income, itemized expenses, profit or loss, tax compliance, changes in employees or inventory, and whether post-filing bills were paid on time. Missing these reports or falling behind on post-filing taxes is one of the fastest routes to dismissal.
Guarantors of Business Debt Are Not Protected
Chapter 13 includes a co-debtor stay that shields co-signers from collection while a case is active, but it covers consumer debts only.3Office of the Law Revision Counsel. 11 U.S.C. 1301 – Stay of Action Against Codebtor Anyone who co-signed or guaranteed a business loan gets no protection from the filing. Creditors can pursue the guarantor for the full balance of the business debt during the entire case. Sole proprietors whose spouse or family member guaranteed a line of credit are often surprised by this.
The Debt Limits That Can Disqualify a Sole Proprietor
Even a qualifying individual has to fit under hard debt caps. The court measures debts on the filing date and counts only obligations that are fixed in amount and not contingent on some future event. For cases filed between April 1, 2025, and March 31, 2028, the ceilings are $526,700 in qualifying unsecured debt and $1,580,125 in qualifying secured debt.1Office of the Law Revision Counsel. 11 U.S.C. 109 – Who May Be a Debtor The Judicial Conference of the United States adjusts these figures every three years to track inflation.4Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases
Personal and business debts are added together for a sole proprietor. A $300,000 mortgage plus $250,000 in equipment loans sits at $550,000 in secured debt, still well inside the cap. Layer in $400,000 of unsecured vendor debt on top of personal credit cards and medical bills, though, and the unsecured limit is gone. When that happens, the court will not confirm a Chapter 13 plan, and the debtor has to look at Chapter 7 or Chapter 11.
How Business Income Shapes the Repayment Plan
Chapter 13 payments come out of “disposable income,” meaning what is left after necessary living expenses. For someone running a business, the statute allows expenses that are reasonably necessary to keep the business operating to be deducted before disposable income is calculated.5Office of the Law Revision Counsel. 11 U.S.C. 1325 – Confirmation of Plan Rent, payroll, inventory, insurance, and similar operating costs come off the top.
Plan length depends on income. Below the state median, the plan runs three years unless the court approves longer. Above the median, it generally runs five.6Cornell Law School. Chapter 13 Plan The trustee collects monthly payments and distributes them according to the priority rules, with domestic support obligations and certain tax debts paid first.7Office of the Law Revision Counsel. 11 U.S.C. 507 – Priorities
The “regular income” requirement does not demand a fixed salary. Seasonal or variable business income counts as long as it is stable and predictable enough to fund the plan, and courts evaluate that using historical earnings, not just the month of filing.
What Chapter 13 Does for Business Assets
Unlike Chapter 7, Chapter 13 does not liquidate. There is no trustee selling off equipment. Instead, the plan must pay each secured creditor at least the value of its collateral over the life of the plan.5Office of the Law Revision Counsel. 11 U.S.C. 1325 – Confirmation of Plan
That opens up a useful tool called cramdown. If a piece of business equipment is worth less than the loan balance and was purchased more than a year before filing, the plan can split the debt: the current fair market value is treated as a secured claim and paid in full, while the rest becomes unsecured debt that typically pays only pennies on the dollar. For a sole proprietor carrying depreciated machinery with an oversized loan, cramdown alone can justify the whole case.
Exemptions matter here too. The federal exemption for tools of the trade is $3,175, and many states offer higher amounts.8Office of the Law Revision Counsel. 11 U.S.C. 522 – Exemptions In Chapter 13, exemptions set the floor for what unsecured creditors must receive: the plan has to pay them at least what they would have gotten from a hypothetical Chapter 7 sale of non-exempt assets.
If Your Business Is Not a Sole Proprietorship
An LLC, corporation, or partnership cannot use Chapter 13 at all, and a sole proprietor above the debt caps cannot either. Three other chapters may fit.
Subchapter V of Chapter 11
Subchapter V was created by the Small Business Reorganization Act specifically for small businesses that need to reorganize without the cost of a full Chapter 11.9Department of Justice. Subchapter V Small Business Reorganizations Corporations, LLCs, and partnerships are all eligible. The debt ceiling as of April 1, 2025, is approximately $3,424,000, down from the temporary $7.5 million threshold that expired in June 2024.4Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases
The process moves faster than standard Chapter 11. The debtor must file a reorganization plan within 90 days of filing.10Office of the Law Revision Counsel. 11 U.S.C. 1189 – Filing of the Plan A specialized trustee works with the business to develop a feasible plan, and quarterly U.S. Trustee fees and heavy disclosure requirements are avoided. There is no personal-income requirement; the business just needs projected earnings that can fund the plan. For most small entities in trouble, Subchapter V is the first option to consider.
Chapter 12 for Family Farmers and Fishermen
Farming and commercial fishing operations have their own chapter with higher caps and rules built around seasonal cash flow. At least half of gross income must come from the operation. The current debt limit is $12,562,250 for a family farmer and roughly $2.5 million for a commercial fisherman, and family-owned partnerships or corporations can file as long as one family holds more than half the equity.4Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases For operations that qualify, Chapter 12 is almost always a better fit than Chapter 13.
Chapter 7 Liquidation
When reorganization is not realistic, Chapter 7 shuts the business down and liquidates non-exempt assets to pay creditors. Both individuals and entities can file. A sole proprietor filing Chapter 7 ends the business and receives a personal discharge of eligible debts. An entity that files Chapter 7 gets no discharge; it simply dissolves after distribution. The filing fee is $338 for Chapter 7 and $313 for Chapter 13.