Business Debt on Personal Bankruptcy

[MiamiFamily4]

I am currently in a weird situation that no Google search can help me find... I started a small car dealership a few years back and just wasn't making the money I wanted or expected. Business was profitable, just wasn't what I was thinking. I posted my resume back on the job market and was able to find something. I put my business up for sale and had some interest from other dealers, but my current sales manager was the most interested. I put together with my attorney the purchase agreement with all current debts, loans, bills and incoming revenues. My sales manager was the only one who accept my offer so I sold him business with a 10 day notice to transfer all inventory bank loans which I had a personal guarantee on would be transferred to his name.

To make a long story short, this never happened and within 30 days he had closed business, he has disappeared and banks are looking to collect on personal guarantees I signed. I do have a lawsuit pending on him personally on whats still owed to me an what banks are looking to collect, but I am pretty much kissing that goodbye.

(I know now that I should have done things differently so I would rather not get, "I SHOULD HAVE DONE" answers and would like some help on what I should do now to get rid of this burden)

My questions are as follows if anyone can assist.

1.) I spoke to a bankruptcy attorney locally and told me that based on my current household income I can only file for Chapter 13. Is this correct?

2.) I did read online in another bankruptcy site that if you have past business debt you automatically qualify for a chapter 7 even though your household income is higher than whats allowable. Is this correct?

3.) When you do a "means test", the final amount available...does that all go towards what you should expect to pay monthly?

Any help at would great...thank you!

[justbroke]

1.) I spoke to a bankruptcy attorney locally and told me that based on my current household income I can only file for Chapter 13. Is this correct?

I can't tell you that. The only way to tell is to use the Means Test and determine whether you are "have the means" to fund a Chapter 13. Otherwise, you would qualify for a Chapter 7. (Additionally, there are debt limits for a Chapter 13! I don't know the exact amount, but if your total unsecured debt is greater than about $400K, you can't file a Chapter13. You would need to file a Chapter 11 (expensive) or a Chapter 7 (if you qualify). There is a way to file a Chapter 7 if your debts are non-consumer. See the next answer.

2.) I did read online in another bankruptcy site that if you have past business debt you automatically qualify for a chapter 7 even though your household income is higher than whats allowable. Is this correct?

This is not accurate. The only way to qualify for a Chapter 7 outside the means test, is to have "mostly" business debt. That means that a simple majority of your debt (think 50.1%) needs to be from non-consumer (business) debt. Your primary home is considered "consumer/personal" debt. Taxes owed to the IRS are usually considered non-consumer (non-personal) debt.

Example, if you own a $500,000 home with a $500,000 mortgage, but have $200,000 in business (non-consumer) debt, then your case is a consumer case and you must meet the means testing requirements. If the debts were the opposite, $200,000 mortgage with $500,000 in business debt, then your csae is non-consumer and you would qualify for a Chapter 7.

3.) When you do a "means test", the final amount available...does that all go towards what you should expect to pay monthly?

Means testing is very tricky area. There is more than just using the means test to find the "disposable monthly income" (DMI). Your DMI is just the starting point of what you might pay. There are other factors including the "liquidation test" as well as payments on secured property that you are keeping. These payments could also include attorney fees that are included in the plan, as well as the Trustee fee, back taxes, and other priority debt.

The first thing to do is figure out which of your debts are consumer and which are non-consumer, add them up separately, then compare them. The biggest one wins.

[MiamiFamily4]

Justbroke....thanks for quick reply. Yes majority will be if not all will be non-consumer. IRS and Past Business Debt will be about 70k and consumer will be about 5k.

I am planning to keep my home of the filling since i have it jointly with my wife and I am looking to file individually since all past business debts is mine.

The good and bad news is that I have a good paying job now and was really hoping to eliminate these business debt entirely unless I receive something in the personal lawsuit with him.

[despritfreya]

Justbroke....thanks for quick reply. Yes majority will be if not all will be non-consumer. IRS and Past Business Debt will be about 70k and consumer will be about 5k. I am planning to keep my home of the filling since i have it jointly with my wife and I am looking to file individually since all past business debts is mine. The good and bad news is that I have a good paying job now and was really hoping to eliminate these business debt entirely unless I receive something in the personal lawsuit with him.

A few items here.

1. You must have missed JB’s comment. Assuming you owe $$ on that home you own jointly with your wife, the amount owed on the mortgage IS included in the bk and, assuming the amount owed on the mortgage exceeds $70k, you are a consumer filer and therefore subject to means testing. (If you have a second and the second was used to help the business, you can move the amount owed on the second to the "non-consumer" side of the equation.)

2. You must list the home as an asset since you are a 50% owner. (DO NOT start changing things now.)

3. Subject to any allowed exemption, if you qualify for a 7 under means testing and decide to file Chapter 7 you will lose control over the law suit against the buyer of the business. The law suit, if filed in your name, is a direct asset of the bk and must be disclosed on Schedule B. The law suit, if filed in the name of your entity (LLC or Inc.) is an asset of the entity and, since the entity must be listed as your asset on Schedule B, the suit becomes an indirect asset of the bk. As an asset under the control of the trustee, either the trustee will pursue it, or, if he determines it has no real value, he will abandon it and return control to you by the closing of the case. If you file a Chapter 13 you remain in control of this (and all) assets.

I do not know if you have any “out of trust” issues with floor financing. If you do that could add another layer of complication to the mix. If you have only met with one bk attny I strongly recommend that you interview two or three others to make sure you found the “right” attny.

Des.

[justbroke]

Thank you Des for providing your excellent ideas.

[BarkingCat]

1. You must have missed JB’s comment. Assuming you owe $$ on that home you own jointly with your wife, the amount owed on the mortgage IS included in the bk and, assuming the amount owed on the mortgage exceeds $70k, you are a consumer filer and therefore subject to means testing. (If you have a second and the second was used to help the business, you can move the amount owed on the second to the "non-consumer" side of the equation.)

Hi, Des. I'm curious if you know of any successful non-consumer cases where a first mortgage was refinanced and a documented percentage of the the cash out went to business debts? I know Jones (4th circuit) dealt with a refinanced second mortgage, but not sure how/if that guidance applies to a first mortgage.

Thanks!

[justbroke]

I don't have anything specific for you, but the issue is how to prove that some portion of the money used to refinance a first mortgage was used for business? With a second mortgage, there is no question about whether the amount was used to "purchase" or refinance an existing first mortgage. it is like a second mortgage is a HELOC and the proceeds used for something like debt consolidation or even a business.

If you could "prove" that the amount refinanced of the first mortgage, less the balance that was due and owing on the paid off first mortgage, was used for business, you could overcome an objection that the mortgage was consumer debt. However, that goes to the amount of the refinancing balance that was not attributable to paying off the old debt. You would need to show how these funds were used, not just talk about what you did with it (actual evidence).

So many issues... like what if you paid down that balance on the mortgage. What part was attributable to the business debt?

Of course, I'm just thinking out loud. It is an interesting topic.

[despritfreya]

What JB said above. . . .

Des.

[BarkingCat]

Though I was self employed at the time, it's not exactly business debt, but tax-related, so non-consumer debt. I did a cash-out refi on the advice of my EA, with the funds going to pay her fee for submitting an OIC (which was ultimately rejected) and paying off back taxes owed to the state. She'll testify/sign an affidavit saying so. Funds were deposited in a separate account and I have statements, cancelled checks, and the OIC paperwork to prove how the money was used.

I've talked with only one bankruptcy lawyer about it so far and he insisted it couldn't be done. I've got other lawyers to interview...

Thanks!

[justbroke]

Talk to more attorneys. It can be done if there is a chain of evidence proving how the money was spent.