If you are a California small business owner and are considering filing for bankruptcy, you may have heard the terms “Chapter 7” or “Chapter 13,” but you may not fully understand the difference between the two types of bankruptcy filings. Even if you do have a general idea of the difference between the two bankruptcy processes, you may not know whether both types are available to you, and if they are, which one might be a better option.

Just what is the difference between a Chapter 7 bankruptcy and a Chapter 13 filing?

Chapter 7 bankruptcy

If you are someone who does not have the resources to pay back your debts, you may be able to find relief through a Chapter 7 bankruptcy filing. Essentially, this type of filing eliminates your debts, giving you something of a fresh financial start, but it is not an available option for everyone. To begin a Chapter 7 bankruptcy filing, you must first pass what is known as the bankruptcy means test. If your household income falls below California’s average household income, you automatically qualify. If not, you may still be able to qualify, but it will involve some extra steps.

Chapter 13 bankruptcy

If you are not able to pass the bankruptcy means test, or if you believe a Chapter 13 bankruptcy might better suit your needs, consider pursuing this solution. Keep in mind, however, that this type of filing typically requires you to pay back at least some portion of your debts over time.

How your business formation type factors in

As a sole proprietorship owner, you have the ability to file for a Chapter 7 personal bankruptcy and potentially still keep your business. However, if you established your business as a corporation, partnership or limited liability company, the Chapter 7 filing must come directly from your business entity.

While this information provides a general overview of the difference between a Chapter 7 and a Chapter 13 bankruptcy filing, please note that this is not an exhaustive explanation of all key differences between the two types.