Chapter 7 Means Test Exempt due to Business Debt

[Giraffe64]

Hi,

I am curious if anyone has personal experience with this - utilizing a Chapter 7 vs a Chapter 13 because over 50% of debt is business debt. Is this possible or a common option? Long story short, my mid sized business has failed and has over $1 million in personally guaranteed debt which is more than all consumer debt (including two mortgages, second mortgage, car loan, all credit cards student loans and medical debt). High income W2 earner ($200K+) family of 5 with small children in NC.

[justbroke]

Yes. I have personal experience.

The exception to the Means Test for "primary business debt" (PBD) debtors is used much less frequently than those escaping the need to file the Means Test who are under-the-median income. Well technically everyone, even the under-the-median and PBD debtors, must file Form B122A-1 which calculates current monthly income. The only exception to the calculation of current monthly income (on that Form 122A-1) is for those that have qualified military service (which may change one day).

If you are a PBD debtor, then you'd file B122A-1Supp which you would submit along with that Form 122A-1 with no presumption of abuse.

I had no problems when I had investment properties when I filed. The debt on those exceeded my primary residence, cars, and other personal loans. I am also a high income earner in your pay neighborhood, with, at the time, 2 children under 18 and a non-working spouse. The United States Trustee (UST) never questioned my Chapter 7, even though it was a conversion from a Chapter 13. Regardless, I still had negative disposable monthly income ($2,000+ in the negative) and I still opted to file a new equivalent B122-A-1 (Calculation of Current Monthly Income) as it was somewhat unknown if a debtor converting from Chapter 13 had to file a new Means Test in my district.

I would think that you would definitely get on the UST's radar and they are going to check your numbers. Just make sure you hire an attorney that has done their fair share of non-consumer Chapter 7 filings. You will likely need to prove that you indeed have those guarantees, they are recourse loans, and that the amount is in fact > 51% of your personal debt. In many districts, income tax is not counted as personal debt and I know that helped me as well since I had $$$ of IRS debt.

[Giraffe64]

Wow, I really appreciate the detailed answer. I’ve never seen the monthly income form before, that is very helpful. A big dilemma to filing a Chapter 7 is we do have “assets” (no real equity, they have mortgages and second mortgages and loans attached) and personally guaranteed SBA liens. I’ll have to figure out how to navigate that. Out of curiosity, did the original Chapter 13 not work out for you and then you decided on a 7?

[justbroke]

I was trying to save my investment properties but they were empty at the time and I had a hard time getting suitable and stable tenants. I rethought my entire strategy and decided to just let them go in the bankruptcy, so I converted to a Chapter 7.

If your SBA loan is secured by your primary residence (home), then that could get interesting. If the liens are only against the investment properties, then you'll need to make a decision on whether you just want to be done being a landlord at this time and surrender them in the Chapter 7.

[Giraffe64]

I was trying to save my investment properties but they were empty at the time and I had a hard time getting suitable and stable tenants. I rethought my entire strategy and decided to just let them go in the bankruptcy, so I converted to a Chapter 7.

If your SBA loan is secured by your primary residence (home), then that could get interesting. If the liens are only against the investment properties, then you'll need to make a decision on whether you just want to be done being a landlord at this time and surrender them in the Chapter 7.

Yep, liens against the primary residence (after two mortgages - so very little equity) as well. The homestead exemption covers it, but what would happen after a BK is discharged? I wonder if I could negotiate with the SBA to pay off the equity (not the full SBA loan amount) and get the liens off after the BK (or is that part of the BK?). Just don’t want to risk a primary residence being foreclosed on when we’re up to date on secured payments & our kids in the local schools

[justbroke]

The SBA reads as though you pledged the primary residence. That would be a consensual lien and the homestead would not protect the home against the SBA. (Yes, the equity would be protected to the extent it wasn't otherwise pledged; such as to the SBA). As such you would need to deal with the SBA on the primary residence. I have never negotiated with the SBA so I don't know what they would want to do with an offer in compromise or how to navigate that. I guess that even if you did settle with them, the 1099-C could be dealt with later since the underlying debt was discharged in bankruptcy. You would need tax advice on that topic since I'm not providing any tax advice.

Suffice it to say that you will need an bankruptcy attorney that can navigate the SBA waters.