Business Debts in Bankruptcy: Mostly Dischargeable in Chapter 7 or Chapter 13 Bankruptcy
Business debts in bankruptcy are treated, with a few exceptions, like any other kind of secured or unsecured debt. That is, if unsecured (no collateral attached to the debt), it will be discharged entirely in a Chapter 7 bankruptcy or repaid to the same percentage extent as any other unsecured debt in a Chapter 13 bankruptcy. If secured (collateral attached to the debt), the debt is likewise dischargeable, but the collateral will be reclaimed by the creditor.
Business Debts in Bankruptcy: One of the Original Purposes of Bankruptcy!
Business debts in bankruptcy are given special consideration. If you are a "non-consumer debtor," meaning that 51% of your personal debt is "non-consumer" debt, you need not complete the Means Test in a Chapter 7 bankruptcy. The Means Test is the test governing your eligibility for Chapter 7 bankruptcy, and it applies only to "consumer debtors," whose majority amount of debt is "consumer" debt (credit cards used for personal purposes, medical debt, lines of creditor for personal purposes, etc.). The Means Test purports to determine whether your household income is too great to allow you to file a Chapter 7 bankruptcy. If the result of the Mean Test is that your household income is greater than the median income for a household of the same size in Michigan or other state that you reside in, you are ineligible for a Chapter 7 bankruptcy and must file a Chapter 13 bankruptcy instead. Thus, if the majority of your debt is business debt in bankruptcy, you do not need to complete the Means Test. You will be eligible for Chapter 7 bankruptcy regardless of the amount of your household income. Why? Because Congress' intent in inserting the Means Test into the US Bankruptcy Code in 2005 was to ferret out alleged "abusive" Chapter 7 filings, by which they meant Chapter 7 debtors who really could afford to pay back some of what they owed to their creditors in a Chapter 13 bankruptcy. However, Congress determined that the definition of "abusive" did not include those whose debts largely originated with business ventures or opportunties. A large part of the motivation behind the framers of our Constitution and our government since the time of that framing in allowing for the discharge of consumer and business debts in bankruptcy is to encourage entrepeneurship and new business ventures. Without much of a social safety net in this country for those whose ventures (and incomes) fail, the US government has left bankruptcy, effectively, as our social safety net. You are entitled to a fresh start, the Bankruptcy Code says in essence. If you are in bankruptcy because of a failed business venture, well, we, the US government, appreciate the effort to make our national economy that much more successful, and your Chapter 7 bankruptcy filing will not be considered abusive regardless of your actual income. Try, try again, and maybe next time you'll succeed and hire lots of employees who will then use the wages you pay them to buy other goods and services, all thanks to the easy discharge of your business debts in bankruptcy. That's the general idea, anyway.
Business Debts in Bankruptcy: Is a Debt a Business Debt?
The primary question, then, when there are business debts in bankruptcy is going to be, "Is this a business, non-consumer debt or a personal, consumer debt?" This is often an easy question to answer—but not always. If the debt is a personal guarantee on a loan made directly to the business, this is usually easily evidenced from the loan agreement made between the lending bank and the business, with your signature at the bottom as a personal guarantee. But what if it's a personal credit card that you simply used for business purposes? The percentage of "consumer" debt vs. "non-consumer" business debt comprising the balance of that credit card will have to be determined to the penny. It is a crucial exercise to undertake, one that an experienced Michigan bankruptcy attorney such as John M. Hilla will not fail to explore. (It is an easy "miss" for less experienced attorneys, or attorneys dabbling in bankruptcy without the necessary commitment to learning this complex practice area.) The math has to be worked out: if 51% of your debt is non-consumer debt, the Means Test can be avoided. But documentation of that percentage, including months or years' worth of credit card statements, may need to be provided to the US Trustee, the agency of the US Department of Justice that oversees Chapter 7 bankruptcy eligibility, should they decide to question. An experienced Michigan bankruptcy lawyer such as those of The Hilla Law Firm, PLLC will know how to draft your petition schedules to give the US Trustee as much information as possible about the basis for the assertion that a Chapter 7 case is a non-consumer case.
Business Debts in Bankruptcy: Is it Your Personal Debt at All, or the Business'?
The next question regarding business debts in bankruptcy is whether a business debt is your personal debt at all. If it isn't, it should not be listed in your bankruptcy petition, and your bankruptcy will not discharge it. If the business the debtor was involved in was a sole proprietorship, the debt resulting from the business is treated as individual debt and is dischargeable through the individual's personal Chapter 7 filing to the same extent as other, non-business related debts. If the business in question was a general partnership or other corporate form, such as an LLC, the debt may not be dischargeable in the individual's personal Chapter 7 or Chapter 13, unless there is a personal guarantee on the business debt. A corporation is a stand-alone legal entity, a separate person entirely from the individual or individuals running the business. Just as any individual filing for bankruptcy could not list and discharge debts for their uncle or a friend, individuals cannot list and discharge debts belonging to a corporation, even one which, like the single-member LLC, is not taxed separately by the IRS. Thus, it is extremely important when listing your debts for your bankruptcy attorney to specifically designate any debts which may be business-related rather than personal. This does not necessarily mean that your attorney does not need to know that they exist.
Business Debts in Bankruptcy: Some "Priority" Debts Are Not Dischargeable
Finally regarding business debts in bankruptcy, depending on the nature of the business in question, there may be debts related to the business which are classified as "priority" debts by the US Bankruptcy Code and which will not be dischargeable, period. Some examples include wages owed to former employees, payments to ERISA-qualified benefits plans, sales tax and other tax debts, and other business ownership obligations under Federal law. If these obligations are present in your circumstances and you lack the ability to pay those debts in full, a Chapter 13 bankruptcy may be the best form of bankruptcy for you. A Chapter 13 bankrupty will allow you to repay non-dischargeable, priority debts in full at 0% interest over a 3-5 years with no taxable liability. If you are considering filing for bankruptcy and are concerned about the balance of personal and business debt that you are carrying, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation so that we can discuss the best options for you.