Can a Capter 13 Bankruptcy be used to reorganize my business debts.?

CHAPTER 13 BANKRUPTCY IS AVAILABLE TO INDIVIDUALS WITH A REGULAR SOURCE OF INCOME

The filing of a Chapter 13 Bankruptcy is available to an individual with a regular source of income. The Bankruptcy Code defines regular source of income, as "income that is sufficiently stable to enable such individual to make payments under a plan under Chapter 13". Most people who file Chapter 13 do so to prevent a sheriff sale and to reorganize their mortgage debt, to pay delinquent taxes or simply because they are not eligible to file a Chapter 7 Bankruptcy for some reason.

 

CHAPTER 13 BANKRUPTCY CAN BE USED TO CONTINUE OPERATING A BUSINESS AND REORGANIZE ITS' DEBTS

Section 1304 of the Bankruptcy Code defines a debtor engaged in business as "a debtor that is self-employed and incurs trade credit in the production of income from such employment is engaged in business". For instance, if a person owns their own business as a sole proprietor, then any business debts on which they have personal liability can be included in their Chapter 13 Bankruptcy. Similarly, if a person is a partner, the partnership's assets would not become property of the bankruptcy estate, but only the individual debtor's interest in the partnership. Likewise, the individual's liability for their portion of partnership debts would be considered in the bankruptcy. The debtor has to file the case in their name, not in the name of the business, as a business entity cannot file for Chapter 13 Bankruptcy. Corporations, partnerships, limited liability companies (LLC) and other non-individual entities are not eligible to file Chapter 13. If you want to file a bankruptcy with respect to those particular entities, then a business Chapter 11 bankruptcy is required. However, it should be noted that an individual is also eligible to file under Chapter 11. Generally, it is more preferable though to file under Chapter 13. The reason is that more extraordinary costs are often incurred under a Chapter 11, such as increased attorney fees, quarterly U.S. Trustee fees and the possible compensation of committee's counsel. Also, the petition filing fee in a Chapter 11 Bankruptcy is $1,717.00, whereas the petition filing fee in a Chapter 13 Bankruptcy is only $310.00. A Chapter 13 is simpler and just less time-consuming that a Chapter 11.

 

DEBT LIMITATIONS DETERMINE ELIGIBILITY TO FILE A CHAPTER 13 BANKRUPTCY

The Bankruptcy Code does restrict an individual's ability to file under Chapter 13. Oftentimes self-employed debtors have many financial obligations and may not be eligible to file a Chapter 13 Bankruptcy. The debt limitations are non-contingent and liquidated debts that existed on the date of the bankruptcy filing that are no more than $1,184,200.00 in secured debts and $394,725 in unsecured debts. Situations may arise where your property is secured by debts that total more than the allowed amount, but the property is actually worth less than that allowed amount. The courts have utilized a valuation test and have taken the position that the value of the security determines the qualifications to file a Chapter 13. To the extent there remains an unsecured portion after applying the valuation test, then that unsecured portion is to be considered amount the unsecured debts in arriving at the debtor's qualification to file a Chapter 13.

 

THE "MEANS TEST" ALSO APPLIES TO A CHAPTER 13 BUSINESS DEBTOR

A debtor is required to file a statement of current monthly income aka the means test upon filing a Chapter 13 Bankruptcy. This looks at all income the debtor has received for the past six months prior to the month of the filing of the petition. The means test applies to an individual debtor filing a personal Chapter 13 Bankruptcy, as well as an individual filing a business Chapter 13 Bankruptcy. The current monthly income or disposal income for a business is calculated on the basis of gross income minus expenses that are necessary for the "continuation, preservation and operation of such business".  The means test will then determine how long the applicable commitment period is.  Otherwords, how long does one have to continue in Chapter 13.  The commitment period for most debtors engaged in business is normally 60 months. An exception to the filing of such a statement would be the filing of a Chapter 7 Bankruptcy where the majority of the debtor's debts are business related. Chapter 7 only requires the filing of a statement where the debtor's debts are primarily consumer debts.

 

CHAPTER 13 DEBTOR ENGAGED IN BUSINESS REQUIRED TO SUBMIT CERTAIN DOCUMENTATION

A Chapter 13 trustee oversees all Chapter 13s and is required to obtain certain specific information from the debtor. If the debtor is engaged in business, then the trustee is required to elicit additional information, such as "investigate the acts, conduct, assets, liabilities and financial condition of the debtor, the operation of the debtor's business and the desirability of the continuance of such business, and any other matter relevant to the case or the formulation of a plan". In order to better assist the trustee, a self-employed person or debtor engaged in business must complete a business questionnaire, with attachments of various types of financial information. It is also necessary to submit monthly operating reports showing the ongoing operation of the business. 

 

A CHAPTER 13 DEBTOR MAY UTILIZE CASH COLLATERAL, BUT ONLY UPON APPROVAL

In order for a debtor to continue operating his or her business, it is oftentimes necessary to obtain funds to meet everyday business expenses. The normal source of those funds would be to use cash collateral. The Bankruptcy Code defines cash collateral as "cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents, whenever acquired, in which both the estate and an entity other than the estate have an interest". Therefore, it is necessary for the debtor to take certain first steps upon filing a Chapter 13 Bankruptcy. Section 363(c)(2) and 363(c)(4) prevents the use of cash collateral without obtaining the consent of the creditor who holds a security interest in such collateral or to obtain the approval from the Bankruptcy Court. Also, if any security agreement so provides, cash collateral may also include any existing proceeds or after acquired. A Chapter 13 business debtor is considered to be a fiduciary of any cash collateral and therefore is required to segregate or set aside  an account for such collateral.