Business Bankruptcy and Means Testing

[biotechsolution]

I'm helping a friend close up his business. He has racked up quite a bit of debt in trying to get the business going and since the business was run has a sole-proprietor I'm not quite sure how the bankruptcy will work. Since the business was a part-time venture he still has a more or less full time job and considerable income. How does it work with regards to the means test and being able to dismiss his case due to substantial abuse? Everything we have read points to means testing and substantial abuse only applies to consumer debt. Were business debts left out for a reason? If he has disposable income after Schedule I and J, does this still apply to business bankruptcies?

[DeadManCrawling]

Hi, and welcome.

There are a couple of considerations:

1. Business debt IS considered differently, and not subject to the means test. This does NOT mean, necessarily, that he can skip the means test, though. Business debt is excluded, if a person's MAJORITY of debt is from business.

2. Since your friend is a sole proprietor business debt, business income, personal debt and personal income will be treated as one and the same. All categories will be added up.

Your friend sounds like a perfect example of why a business should be incorporated. Mine is a Sub-s corp, which is useful in a couple fashions that I will explain later in this post.

Here is how you can help him figure out whether the means test applies to his case:

Add up ALL his debts, not just the business debts. He must do this because he is a sole proprietor. Include his personal debts such as mortgage, car payments, loans, medical bills, etc. If at the end of this process, the MAJORITY of his debt is from the business startup attempt, he should be in the clear for Chapter 7 or Chapter 13. That number would include current outstanding balances, not monthly payments. So, if he owes 340k on the house, and 150k in business debt, his majority of debt would be consumer, NOT business. I am not sure by what percentage it must be business debt (if 51% or higher is an automatic or they look for, say, 2/3).

In the event that his personal debt is higher, he may need to consider Ch13 if he wants to avoid the "presumption of abuse" clause. This is possible because he has higher than median income and it is from a regular paying job.

I have a still functioning, and doing quite well, Sub-s corp that is my income. The company has little debt, perhaps 20k. That's credit card debt on a personally guaranteed card. I will be including that in my 13 filing. They COULD still come after the company, later, but my attorney says that is very unlikely.

The reason your friend probably should have incorporated is this:

The sole proprietor situation puts ALL of his assets and debts on the table for a BK trustee to look at.

Were his business incorporated, the trustee would only see that he owned "stock" in a closely held or entirely owned corporation. That little bit of separation might, should, have allowed him to bankrupt the company on its own without touching himself personally.

DMC

[biotechsolution]

We added up all his consumer debt and business debt. His total debt is 85% business and 15% consumer. So it's definitely 'primarily non-consumer'. Our main question is what if he shows income available on Schedule J? The other question is about child support, what if it's not court ordered but has been paid for the last 4 years, not in arrears and within the state court guidelines? Does the bankruptcy court require you to go out and get a court order?

[lrprn]

Your friend needs to start interviewing bankruptcy lawyers. Any time business debt mixes with personal debt to this extent, this is NOT a situation to figure out without knowledgeable legal help. He needs to make appointments with 3-4 experienced bankruptcy lawyers in his area for free consultations. Lay it all out, and find out what his best options are in this circumstance. Your friend's financial situation is complicated - he needs expert legal counsel to sort this out and do the right thing for himself.

[Brendon]

I would certainly talk to several lawyers. My business debt was about 90%, consumer debt 10%. My lawyer helped significantly in explaining what options I had. I even moved cities, sold my house, and bought a new one during my bk process. It is a different ball game w/ business & personal debt mixed.