Ch 13 to keep business?

[knight0824]

My husband and I have racked up a lot of personal and business debt and the business debt was personally guaranteed by both of us. One attorney is advising me to close the business and a different one says he can do a personal chapter 7 and a 13 to keep my business.

We owe roughly 280K. Revenue will be over 1 million this year. My husband wasn’t making anything most of the last 2 years and now has a job but we took out loans to cover his expenses and payroll. They were merchant cash advances and they are very predatory.

My dilemma is that to be able to pay my employees who are like family now I can’t shut the business down a abruptly bc of the length of time it takes for insurance to pay us for our services. We offer physical occupational and speech therapy to elderly and people who have strokes etc.

I am scared to do a ch 13 because of all the things people say and the first attorney advised against it bec most people fail he said.

i just want to do the right thing and i know i made a lot of mistakes thinking that the business and my husbands income would recover.

He is working now and has a salary. We will have to do a personal ch 7 regardless the question is whether to keep the business with a ch 13. And what the payment structure might look like. Is it even worth the stress.

I plan to ask my attorney tomorrow but just wanted some personal experiences as i have no idea what to expect. I appreciate the forum and your posts are helpful.

[justbroke]

Welcome to BK Forum.

First, don't be afraid of a Chapter 13, and most people actually complete a Chapter 13. It's just that a high percentage, near about 40%, fail to earn a discharge in a Chapter 13. (The successful rate was 56% in 2022 and some districts have success rates of near 90%. Source: US Courts BAPCPA Report 2022.)

Second, if the business runs at a deficit I don't know that I would keep the business unless I had sufficient reserves to carry over when the payments came in. I was a partner in a medical services business and we had a $250K line of credit that carried us through the periods when payments were slow. We didn't go more than $50K into the line, but one time we went about $100K into the credit line. We were scared when we went that deep into the credit line. It's no fun.

Third, I don't know what you mean by "keep the business with a [chapter] 13." If you discharge all your debts under a Chapter 7, then what is the purpose of the Chapter 13? (We call them Chapter 20s.) Typically, a Chapter 20 is done to deal with any non-dischargeble IRS debt.

Finally, are you trying to rehabilitate the business? There is a Subchapter V in Chapter 11 that's a little easier for small businesses to use Chapter 11. It won't be cheap to file any sort of Chapter 11, but if the business is trying to restructure the debt then a Subchapter V may be worth a look.

[knight0824]

In Arkansas so the attorney is saying I would do a chapter 7 personally and a chapter 13 for the business debt. He mentioned the 11 but said it is more expensive and that we could get it done in a 13. I guess i need to ask what he thinks the payments will be etc. Like what percentage I will be looking at.

We have been operating at a deficit but only bec of the debt payments. I’ve been paying all of my husbands bills too (soon to be ex at least once we figure this BK out) and the 8-9K per month toward the debt payments. Plus his car payment which was 1200$. So there’s definitely been profit that I could pay back the loans. I just am unsure how much energy and stress the process will be. Not sure I’m up for it and like you said to not be able to have any credit for months that are slow is scary.
Thanks for your reply!

[justbroke]

I'm missing something. A business entity (LLC, corporation) can't file a Chapter 13. If you have a medical services business, I'm sure that it's not operating as a sole proprietorship. If it's a corporation/LLC, then I don't know why an individual needs to file a Chapter 7 followed with a Chapter 13 (a/k/a Chapter 20) if they aren't dealing with non-dischargeable debt. I don't know why you personally need to do the Chapter 13 after the Chapter 7 is discharged... there's nothing left to discharge. You are not personally liable on anything at that point other than maybe a mortgage or other secured liens which passed through the Chapter 7 discharge.

My only thought is that you're using the Chapter 13 because some of the business debt is secured by your residence or other property (other secured liens). Then that would make sense. It doesn't "save" the business, but does protect your property from the secured creditors. It does this by allowing you to pay those creditors over the life of the Chapter 13. Remember, the Chapter 13 would receive no discharge so you'd have to pay the secured creditors in full.

You will need to run the numbers and see if you could actually get to equity. Without a line of credit, running this type of business is going to be difficult at best. I've run a medical staffing company with 30-90 days late payments from major hospital and medical groups. These clients--hospital and medical groups--didn't seem to care that they were hurting a small business by paying late. We invoiced immediately after our weekly payroll runs. It was not due to any late billing.

[despritfreya]

Several things you need to know.

1. The MCA lenders have recently started to “enforce” their UCC1 blanket lien rights by contacting customers (in your case, insurance providers) in an attempt to get the customers to send payments belonging to the debtor to the lenders. In many instances the MCA lenders are successful in “garnishing” funds. In other instances, the actions in contacting the customers chills future relationships with the business.

2. In all likelihood, your entity (and you as it relates to the personal guarantees) signed “confessions of judgment” when the MCA loans were taken out. If such a judgment exists, the MCA lenders may try to get to garnish the entity bank accounts even without domesticating the judgment in your state. If they know where you personally bank, they may try there as well.

3. Your entity, if it wishes to continue to operate, will file a Chapter 11 Subchapter V bankruptcy. You will still have to deal with owing the MCAs but, chances are, the value of all assets (including receivables) are way less than the amount owed to the MCA (and other) secured lenders. Hopefully, that SBA (EIDL) loan I assume the business took out during the COVID times is in first position and eats up most of (if not all of) the value of the assets. To the extent the UCC1 blanket liens held by either the SBA and/or the MCA lenders are more than the value of the assets, that part of the debts will be treated as general unsecured claims and will share in a tiny payout over the course of the Chapter 11. Stay away from any attorney that indicates an entity can file a Chapter 13. Entities cannot file Chapter 13.

4. You will need your own bk to take care of the fall out of the entity bk. This may or may not be a Chapter 13. In my district, the owners of the entity look at Chapter 13 to keep a Chapter 7 Trustee away from messing with the operations of the entity. Your district may be different as the Chapter 7 trustees may be less aggressive. Regardless, get the entity bk up and running smoothly first. Chapter 11s require a lot of effort on your part so, if you can avoid dealing with 2 cases at the same time, you will be better off.

Interview a plethora of attorneys for both the business and you. Pick the one or two (may need different attorneys for the two cases) that you are most comfortable with.

Des.

[knight0824]

Thank you both. The only solution that I keep coming back to is to shut down the business altogether. I have to do it rather quickly bec our payroll is delayed 30 days so that I can be sure to pay these people for their work. I will process payroll early to avoid the MCA companies from taking those funds I guess. I have moved the bank account but realize now that won’t fix the problem for long.
I am going to call another attorney. This will be the fourth one.

I worry that if I keep the business open we will not qualify for a chapter 7 personally and like you have mentioned it will be difficult to be financially stable without a line of credit for the length of the pay back. Shutting down employment for my staff at Thanksgiving seems really awful but I don’t see another option.

I appreciate your input. It does help me to see the gravity of the MCA debts.