Chapter 7 vs. Chapter 13 Bankruptcy: What’s Best for Maryland Businesses?


Declaring bankruptcy can be a difficult decision for business owners in Maryland. However, it may be necessary to protect the business from creditors and get a fresh financial start. There are two main types of bankruptcy options for businesses,Chapter 7 and Chapter 13. Deciding between the two chapters involves understanding key differences and consulting a qualified bankruptcy attorney in Maryland.


Law Offices of Marc A. Ominsky help clients navigate complex legal situations that could compromise their future interests. With experience in bankruptcy and business law litigation, our team will work to resolve your bankruptcy disputes. Contact us now at 443-539-8712 or email us at info@mdlegalfirm.com to speak with our experienced team of bankruptcy attorneys. 

Overview of Business Bankruptcy Chapters


Under the federal bankruptcy code, businesses can file for either Chapter 7 or Chapter 13 bankruptcy. The chapters offer different debt relief solutions:


  • Chapter 7 Bankruptcy: This chapter provides for liquidating eligible business assets to pay creditors. Any debts not fully paid are discharged. This chapter typically concludes within 4-6 months.

  • Chapter 13 Bankruptcy: This chapter involves a 3-5-year debt repayment plan supervised by the bankruptcy court. The business gets to keep assets while making payments to creditors over time from future earnings.


Most small businesses opt for Chapter 7 bankruptcy because it allows quicker discharge of unpaid debt. Chapter 13 involves several years of legal proceedings and committed payments that can be challenging for companies. However, certain businesses benefit more from the debt restructuring nature of Chapter 13 bankruptcy in Maryland.


Key Differences in Filing Chapter 7 vs Chapter 13 for Businesses


There are six main differences that a bankruptcy attorney in Maryland will consider when advising whether Chapter 7 or 13 is better for your company:


Eligibility Requirements


Chapter 13 bankruptcy has more narrow eligibility requirements than Chapter 7. To qualify for Chapter 13, the business must have regular income and secured/unsecured debts below certain thresholds. There are fewer restrictions to file for Chapter 7 business bankruptcy in Maryland.


Asset Liquidation


With Chapter 7 bankruptcy, a court-appointed trustee can liquidate non-exempt business assets to pay creditors. Asset liquidation does not occur in Chapter 13. The business gets to keep assets while making ongoing payments over 3-5 years based on disposable income projections.


Length of Proceedings  


Chapter 7 bankruptcy typically concludes within 4-6 months from initial filing to discharge of remaining debt. Chapter 13 involves a 3-5-year legal process with court-supervised debt repayment ending in the discharge of unpaid balances.


Credit Rating Impacts  


Both Chapter 7 and 13 bankruptcy will negatively impact business credit scores. However, Chapter 13 may have less long-term effect if all payments are made on time. This shows creditors a commitment to repaying debt.


Discharged Debt 


For sole proprietors, Chapter 7 bankruptcy discharges eligible business and personal debt, while Chapter 13 only impacts business debts tied to the company's tax ID number. Any personally guaranteed business loans would still need payment in a Chapter 13 case.


Repeat Filing Restrictions


If a business has received a discharge of debt under Chapter 7 bankruptcy, there is typically an 8-year waiting period before being legally allowed to file again. Chapter 13 cases discharged debt can be refiled under Chapter 7 sooner, depending on circumstances.


Weighing these key differences during initial consultations can help business bankruptcy attorneys in Maryland advise clients on the best business bankruptcy filing option. 


Making the Chapter 7 vs. Chapter 13 Decision  


Choosing between Chapter 7 vs. Chapter 13 bankruptcy ultimately depends on a Maryland business's specific situation and needs. Addressing fundamental questions can help narrow down the better option:


  • Does the business qualify for Chapter 13? Not all businesses meet the strict eligibility requirements regarding income, assets, and liabilities. Chapter 7 has more flexible criteria.

  • What debts need to be eliminated? If discharging all eligible business and personal debts is the priority, then Chapter 7 bankruptcy is typically the answer. 

  • Are creditors willing to accept partial repayments? Creditors may only agree to settle for partial debt repayment that Chapter 13 bankruptcy allows versus Chapter 7 liquidation.

  • Can the business commit to 3-5 years of payments? If the financial means and operational capacity exist to stick to a long-term repayment plan, Chapter 13 offers benefits like keeping assets.  

  • What offers the cleanest, fresh start moving forward? For most small businesses in financial distress, wiping the slate fully clean as fast as possible with Chapter 7 is ideal for resuming normal operations.


Addressing these key questions and considerations will allow a qualified bankruptcy attorney in Maryland to guide you toward selecting either Chapter 7 or Chapter 13 to resolve business debts.


Overcoming the Stigma of Business Bankruptcy 


There is often a stigma attached to a business having to declare bankruptcy. However, when faced with crippling liabilities and few solutions, seeking bankruptcy protection is sometimes the most strategic financial decision. With new debt relief tools available, bankruptcy is no longer an end but a new beginning for companies.


The legal professionals at the Law Offices of Marc A. Ominsky have seen many Maryland small business owners recover from debt and thrive again after successful Chapter 7 or Chapter 13 bankruptcy filings. There are also essential steps business leaders can take to preserve their company’s reputation when pursuing bankruptcy:


Be Transparent with Employees & Customers


Honestly communicate about the decision to claim bankruptcy and provide assurance that operations will continue. Temporary reassurance eases concerns about the business closing down.


Emphasize It's About Financial Restructuring


Share that bankruptcy is sometimes needed to discharge unmanageable debts and build a solid financial base. 

Keep Delivering Quality Service  


During bankruptcy, still deliver the same great products/services. Meeting obligations to customers and business partners to reinforce operations is unaffected.  


While declaring bankruptcy involves overcoming difficulties in the short term, an experienced bankruptcy attorney in Maryland can make the process smooth for getting your business back on track financially. With stigma fading and laws constantly improving, bankruptcy protection equips companies with a tool to regain control of their future.

FAQs on Business Bankruptcy in Maryland


Deciding whether to pursue Chapter 7 or Chapter 13 bankruptcy is complex. Answering common questions can help provide clarity on the best debt relief option:


  1. What Debts Can Be Discharged Under Chapter 7 Bankruptcy?

Nearly all unsecured business debts without collateral tied to them can be discharged in a Chapter 7 business bankruptcy filing. This includes unsecured loans, unpaid vendor bills, judgments, credit card balances, past-due rent and utilities, etc.


However, not all debts meet eligibility for discharge. Tax debts, unpaid payroll, child support/alimony, and student loans cannot be discharged under Chapter 7 bankruptcy.


  1. Can I Keep Operating My Business If I File For Chapter 7 Bankruptcy?

Yes, declaring Chapter 7 bankruptcy does not necessarily mean shutting down your Maryland business. While a court-appointed trustee liquidates eligible assets to pay creditors, you can usually keep inventory, equipment, and supplies needed for continuing operations.

The key is proving to the trustee that retaining certain exempt business assets does not limit payouts to creditors. Building this case requires reliable accounting statements and company property valuations. With no personal liability for discharged debt moving forward, many small businesses bounce back successfully after Chapter 7 filings.


  1. What Happens To My Personal Assets In A Business Chapter 7 Bankruptcy?   

For sole proprietors and single-member LLCs, eligible personal assets and properties can be fair game for liquidation in a Chapter 7 business bankruptcy case. This helps settle business debts tied to the owner’s Social Security number.

However, certain personal assets are exempt from liquidation under Maryland bankruptcy law, including clothing, household furnishings, retirement accounts up to certain limits, primary vehicles up to specific values, and primary residences in some cases. An experienced bankruptcy attorney in Maryland comprehensively advises clients on exemptions to protect personal property before filing.


  1. What types of debts can a business repay under Chapter 13 bankruptcy?

Eligible debts for a Chapter 13 repayment plan include past-due taxes, personal loans, credit cards, medical bills, legal judgments, vehicle loans, equipment financing, unpaid rent and utilities, and more. Certain debts like student loans cannot be discharged.



  1. If My Business Files Chapter 13 Bankruptcy, Who Manages The Repayment Plan?   

The US Bankruptcy Court in Maryland and your appointed case trustee oversee your business's Chapter 13 proceedings and debt repayment plan for 3-5 years until discharge.

As the business owner, you or your lawyer prepare the initial plan, including projections for disposable income to distribute towards debts. This involves scrutinizing company accounts to identify reliable future cash flows for payments.

The trustee ensures your accounting is transparent and accurate before the court approves your proposal. If the business income fluctuates after approval, affecting payments, your business bankruptcy attorney in Maryland can request adjusted plans from the court.


Work With A Business Bankruptcy Attorney


Decisions about business survival often boil down to dollars and cents. However, your company’s financial struggles may leave bankruptcy as the only sensible path forward. Chapter 7 and Chapter 13 offer very different debt relief tools for Maryland businesses to utilize. Identifying the key differences and weighing complex factors with counsel from a skilled bankruptcy lawyer gives your company the best advantages out of a difficult situation.


While stigma lingers, the Law Offices of Marc A. Ominsky business professionals recognize bankruptcy as an opportunity for companies to eliminate obstacles, reorganize, and restart stronger than ever. Much like personal finance, maintaining prosperity often requires overcoming periods of hardship. An optimal bankruptcy filing paves the pathway for the next prosperous chapter in your company’s remarkable story.


Law Offices Of Marc A. Ominsky has helped businesses navigate business bankruptcy in Maryland. Contact us now at 443-539-8712 or email us at info@mdlegalfirm.com to speak with our experienced team of bankruptcy attorneys. 



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