Final answer:
The correct answer is option D. Chapter 11 or 13.
Step-by-step explanation:
Carol, the sole proprietor of Diners Café, is in a situation where the business's debts exceed what she believes can be repaid. In scenarios like this, businesses have a legal avenue to restructure or manage their debts without ceasing operations, namely through filing for bankruptcy. Specifically, Carol could opt for filing Chapter 11 or Chapter 13 bankruptcy. Chapter 7 bankruptcy involves liquidation of assets and is not suitable in this case. Under Chapter 11, often used by businesses, the debtor proposes a plan of reorganization to keep its business alive and pay creditors over time. Individuals, like Carol, might use Chapter 13, permitting her to keep her business while paying her debts under a repayment plan.
Many firms in the United States opt to continue operating after filing for bankruptcy because this gives them a chance to reorganize their debt and emerge stronger financially, without having to shut down completely. A well-known example is Detroit, which declared bankruptcy to manage a massive debt and liabilities it could not repay. The process enabled the city to negotiate with creditors, restructure its debt, and start to rebuild economically.
As a sole proprietor, Carol has unlimited liability for her business's debts, so bankruptcy protection could help her manage personal financial risks. Without incorporating, she might be personally sued for the debts of Diners Café. This is why sole proprietors sometimes consider bankruptcy options to reorganize debts, rather than closing their businesses altogether.