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 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 the owner files personally and folds both personal and business debts into one three-to-five-year repayment plan.
Who Can and Can’t File Chapter 13
The gating rule is 11 U.S.C. § 109(e). Only an individual with regular income can be a Chapter 13 debtor. Formal business entities are treated as legal persons separate from their owners, and they are not individuals under the statute.
That rules out:
- Corporations (C-corps and S-corps)
- Limited liability companies
- Partnerships, including informal ones based on an unwritten agreement
A sole proprietorship is different because it has no separate legal identity. All business debts, assets, vendor invoices, and equipment belong to the individual owner. The owner files Chapter 13 as an individual, and the business side of their finances comes along with the personal side.
Married couples who run a business together are a common edge case. If the operation is a true partnership — even one with no paperwork — it is a separate entity and cannot use Chapter 13. If one spouse owns the business and the other is simply an employee, it stays a sole proprietorship and remains eligible.2Office of the Law Revision Counsel. 11 USC 109 – Who May Be a Debtor
What LLCs, Corporations, and Partnerships Can File Instead
Businesses that are locked out of Chapter 13 have a close substitute: 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 procedural weight of a traditional Chapter 11. To qualify, total debts must fall below the adjusted threshold, which is approximately $3.4 million as of the most recent adjustment.3U.S. Department of Justice. Subchapter V Small Business Reorganizations
Subchapter V also serves as a backup for sole proprietors whose debts are too large for Chapter 13.
Debt Limits a Sole Proprietor Must Meet
Chapter 13 caps how much debt you can have on the filing date. A temporary unified cap of $2,750,000 expired in June 2024, and the limits have reverted to a two-part test. As of April 2025:
- Unsecured debts must be less than $526,700. This includes credit card balances, medical bills, and unpaid vendor invoices without collateral.
- Secured debts must be less than $1,580,125. This includes mortgages, vehicle loans, and equipment loans backed by collateral.
These figures are adjusted every three years and apply only to debts that are fixed in amount and not subject to dispute.4Federal Register. Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases Exceed either ceiling and Chapter 13 is off the table; the alternative is Chapter 11 or Subchapter V.
The Regular Income Requirement for Self-Employed Filers
“Regular income” means money coming in on a predictable, recurring basis. A sole proprietor has to show the business generates enough steady revenue to fund plan payments. Seasonal businesses with erratic cash flow often have trouble clearing this bar. The court looks at recent earnings history to decide whether the income is reliable enough to support monthly payments over three to five years.
Plan length ties to income. If your monthly income falls below your state’s median, the plan can last as little as three years. If it exceeds the median, the plan generally runs five.5Cornell Law School. Chapter 13 Plan
How Business Expenses Factor In
For a sole proprietor, the court calculates “disposable income” — the amount available to pay creditors — by starting with gross income and subtracting reasonable living expenses and ordinary business operating expenses. Rent for business space, inventory purchases, employee wages, and utilities are deducted before the monthly plan payment is set.6United States Courts. Chapter 13 – Bankruptcy Basics Whatever remains is what creditors receive.
Tools Chapter 13 Gives a Sole Proprietor
The Automatic Stay on Business Assets
The moment the petition is filed, the automatic stay stops creditors from collecting debts, filing lawsuits, repossessing equipment, or foreclosing.7Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay For a sole proprietor whose equipment or inventory is at risk, this is often the most immediate benefit of filing.
The stay has a hole worth knowing about. Chapter 13’s co-debtor protection shields people who co-signed your consumer debts, like a family member on a car loan. It does not extend to business debts. A co-signer on a business loan or line of credit can still be pursued even while your case is pending.8Office of the Law Revision Counsel. 11 USC Chapter 13 – Adjustment of Debts of an Individual With Regular Income
Cramdown on Equipment and Vehicle Loans
One of the strongest tools Chapter 13 offers a business owner is cramdown. It lets you reduce a secured debt to the current fair market value of the collateral. If you owe $20,000 on a piece of business equipment now worth $12,000, your plan can treat $12,000 as the secured claim (paid in full with interest) and move the remaining $8,000 into the unsecured pool, which may be paid only in part.
Timing restrictions apply. A vehicle loan cannot be crammed down unless 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 must have occurred at least one year before filing. The mortgage on your primary residence cannot be crammed down at all, though a wholly unsecured junior lien may be stripped off if the first mortgage already exceeds the home’s value.9Office of the Law Revision Counsel. 11 USC 1325 – Confirmation of Plan
Extra Reporting a Business Debtor Faces
Sole proprietors carry reporting duties that non-business filers do not. While the case is active, you may need to file monthly operating reports covering business income, expenses, post-filing bills, accounts receivable, and bank statements. These give the trustee ongoing visibility into whether the business can keep funding the plan. An income statement and balance sheet are typically required as attachments.
The Statement of Financial Affairs also pulls in both sides of your life. Sole proprietors report personal and business activity in the same document, including recent financial transactions and any asset transfers made before filing.10United States Courts. Statement of Financial Affairs
What Gets Wiped Out at the End
Finish the plan and you receive a discharge, a court order releasing you from personal liability on most debts the plan covered. A debtor education course (separate from the pre-filing credit counseling) has to be completed first.11United States Courts. Credit Counseling and Debtor Education Courses
Several categories of debt survive the discharge:
- Long-term obligations with payment schedules that extend past the plan, like a home mortgage, continue as normal after the case closes.
- Priority tax debts that were supposed to be paid in full under the plan remain owed if any balance is left.
- Child support and alimony cannot be discharged.
- Most government-funded or guaranteed student loans survive.
- Criminal fines and restitution are not dischargeable.
Debts tied to fraud or misrepresentation can also survive, but only if the creditor files a timely action and proves the fraud in court. Without that challenge, those debts are discharged along with everything else. Chapter 13’s discharge is broader than Chapter 7’s in this respect: Chapter 7 excludes fraud-based debts automatically, while Chapter 13 puts the burden on the creditor to object.12Office of the Law Revision Counsel. 11 USC 1328 – Discharge
Debt forgiven through a completed Chapter 13 plan is also excluded from your gross income for tax purposes, so you do not owe income tax on the canceled amount — an important detail for a business owner whose discharged balances can be substantial.13Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not?