Some General Guidance about Business Bankruptcy

Posted by Kevin on April 17, 2017 under Bankruptcy Blog | Be the First to Comment

If your business needs bankruptcy relief, you have to start with basic questions about how your business was set up and its debt amount.

 Sole Proprietorship

The most straightforward business bankruptcies tend to be those in which the business is a sole proprietorship. Your business is operated through you under your name or under an assumed business name (“doing business as” or “DBA”).  So, for purposes of bankruptcy, if you operate a sole proprietorship, you file bankruptcy in your name and it will include your personal assets and liabilities and the assets and liabilities of the business.

Other Forms of Business

Basically, this includes corporations, partnerships and LLC’s (limited liability companies).  In these cases, the business entity is the debtor.  If  the owner of the business is liable under guaranties, the owner might also need to file an individual bankruptcy.

Purpose of Bankruptcy

Once you have established what type of business entity is involved, the basic question is whether you want to utilize bankruptcy as a tool to continue in business or as a tool to liquidate and shut down the business.

The General Guidance

Beyond these initial points, here are some basic rules. They will help you be a bit more prepared when you come to meet with an attorney.

1. A corporation, or LLC, or partnership cannot file a Chapter 13 “adjustment of debts.”  Only an “individual” can.  So, if you operate a sole proprietorship, you and the business may be eligible for a Chapter 13 filing.

2. Chapter 13s are sometimes mislabeled “wage-earner plans,” but any source of “regular income” is allowed.” The requirement is simply “income sufficiently stable and regular to… make payments under a plan under Chapter 13.” So if your business income—combined with any other income—is even somewhat stable, you would likely qualify under this “regular income” requirement.

3.  But you and your sole proprietorship CAN’T file a Chapter 13 case if your total unsecured debt is $394,725 or more, or if your total secured debt is $1,184,200 or more. (Note: these limits are adjusted for inflation every three years.) While these may seem like relatively high maximums, be aware that they include BOTH personal and business debts (since you are personally liable for all the debts of a sole proprietorship). Also, the amount of unsecured debt can include that portion of your mortgages and other secured debts in excess of the value of the collateral. So a $750,000 debt secured by real estate now worth $550,000 adds $200,000 to the unsecured debt total.  In addition, if you want to file a Chapter 13 as an individual and you are the owner of a corporation, you may have to consider as your unsecured debts those debts of the corporation which you personally guaranteed.

4. If your debt totals are above one of the above debt limits, you can still file a Chapter 7 “straight bankruptcy” case for the business, but that means, for all intents and purposes, the business will shut down.  Chapter 7 tends to be a better option for cleaning up after a closed business, whatever its legal form.

5. A corporation or LLC does not receive a discharge in a Chapter 7.

6. If your debt totals are above one of the Chapter 13 debt limits and you are trying to save the business, one option is a Chapter 11 “business reorganization.” for the corporation, LLC, or partnership.   The disadvantages of Chapter 11 are that it is a hugely more complicated than Chapter 13 which translates into substantially higher legal, filing  and Trustee fees, and the financial reporting requirements are more onerous.  Bankruptcy courts have tried to address these shortcomings with streamlined “small business” Chapter 11s, but they are still often prohibitively expensive.

7. If you do end up filing a personal Chapter 7 case when owing substantial business debt, you may have the advantage of being exempt from qualifying under the “means test” (a test based on your income and allowed expenses) if your business debts are more than half of your total debts.

If you are trying to save your financially struggling business, it is crucial to get competent business bankruptcy advice, and to do so just as soon as possible. You have no doubt been working extremely hard trying to keep your business alive. You will need a solid game plan for using the bankruptcy and other laws to your advantage.

 

Qualifying for Chapter 13

Posted by on June 5, 2016 under Bankruptcy Blog | Be the First to Comment

Chapter 13 sometimes gives you huge advantages over Chapter 7. So how do you qualify for those advantages?  

 

You can file a Chapter 13 case if:

• the amount of your debts does not exceed the legal debt limits
• you are “an individual with regular income”

Debt Limits

Under Chapter 7 there is no limit how much debt you can have. But under Chapter 13 there are maximums for both secured and unsecured debts.

Debt limits were imposed back in the late 1970s when the modern Chapter 13 procedure was created.  Congress wanted to restrict this new, relatively streamlined option to simpler situations. With a very large debt amount, the more elaborate Chapter 11 was instead considered appropriate.

The original debt limits were $350,000 of secured debts and $100,000 of unsecured debts. In the mid-1990s these limits were raised to $750,000 and $250,000 respectively, with automatic inflation adjustments to be made every 3 years thereafter. The most recent of these adjustments applied to cases filed starting April 1, 2016, with a secured debt limit of $1,184,200 and unsecured debt limit of $394,725. These limits apply whether the Chapter 13 case is filed by an individual or a married couple—they are NOT doubled or increased for a married couple. Reaching EITHER of the two limits disqualifies you from Chapter 13.

These limits may sound high, and indeed do not get in the way of most people who want to file a Chapter 13 case. But they can cause problems unexpectedly. As just one example, a serious medical emergency or medical condition that is either uninsured or exceeds insurance coverage can climb to a few hundred thousand dollars of debt shockingly fast.

“Individual with Regular Income”

First, only “individuals”—human beings, not corporations or partnerships—can file a Chapter 13 case.

Second, an “individual with regular income” is defined in the Bankruptcy Code as one “whose income is sufficiently stable and regular to enable such individual to make payments under a plan under Chapter 13.”

If that doesn’t sound very helpful to you, you’re not alone. How “stable and regular” does a debtor’s income need to be before it is “sufficiently” so, in that it enables the debtor to make plan payments?  How is a bankruptcy judge going to make that determination at the beginning of the Chapter 13 case, especially if there hadn’t yet been any history of income from its intended source?

Having such a ambiguous definition gives bankruptcy judges a great deal of leeway about how they read this qualification. Most are pretty flexible at least at the beginning of the case, giving debtors a chance to make the plan payments, thereby proving by action that their income is “stable and regular” enough. But if your income has been inconsistent, you may need to persuade the judge that your income is steady enough to qualify. A good attorney, especially one who has experience with your judge, can present your circumstances in the best light and get you over this hurdle.