December 17th, 2018
HOW DOES BUSINESS DEBT HELP ME QUALIFY FOR CHAPTER 7 BANKRUPTCY?
Many small businesses close within the first 18 months after opening. It is estimated that approximately 80 percent of new businesses fail within the first 18 months. Fifty percent of new businesses fail after the first four years of being opened. Only one in five businesses make it past their five year anniversary. With statistics like this, why would anyone want to open a new business in Florida or anywhere in the United States?
Even though the statistics may discourage some people from opening a new business, thousands of entrepreneurs decide that the risk is worth the dream of owning their own business. However, what happens to the debts a small business owner incurs if theirs is one of the businesses that does not make it. Does the business owner owe all the company debt when the company closes?
PERSONAL LIABILITY FOR BUSINESS DEBT.
If an entrepreneur is a sole proprietor, they are liable for all business debts. In many cases, a small business owner signs personal guarantees for some business debts, even if the owner has incorporated the company to provide some level of protection from personal liability. Sole proprietors and business owners who sign personal guarantees can be held legally liable for the business debt if the company cannot pay the debts. In addition, a creditor can seek a personal judgment against the owner for the business debt so that the creditor can collect the business debt from the owner’s personal income and property.
In many cases, a small business owner has no alternative but to file for bankruptcy relief when a business fails. However, some individuals may have too much income to qualify for bankruptcy relief under Chapter 7.
Fortunately, Congress included a business debt exemption to the Means Test when it passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The business debt exemption encourages entrepreneurs to continue to open small businesses by giving them some level of protection in bankruptcy court if the business should fail and they are personally liable for the debts.
WHAT IS THE CHAPTER 7 MEANS TEST?
The Means Test was added as an income test for Chapter 7 debts when Congress passed BAPCPA. A debtor must meet certain income requirements to qualify for a bankruptcy discharge under Chapter 7. The Means Test was intended to ensure that Chapter 7 was not abused or used by debtors to fraudulently avoid paying creditors when the debtors had sufficient disposable income to pay a portion of their debts through a Chapter 13 repayment plan.
A Florida debtor may qualify for a bankruptcy discharge under Chapter 7 if the debtor’s average income is below the median income for Florida. The average income is based on the debtor’s income for the six months before filing the bankruptcy petition. The debtor’s current monthly income is calculated by dividing the total income for the preceding six months by six. The result is multiplied by 12 to arrive at an annualized income to compare to Florida’s median income.
If a debtor’s annualized income exceeds the median income for Florida bankruptcy filers, the debtor must complete the second section of the Means Test. The second section subtracts allowable monthly expenses from the debtor’s income to determine the debtor’s disposable income. A debtor who has sufficient disposable income to fund a Chapter 13 plan does not qualify for a bankruptcy discharge under Chapter 7.
EXEMPTIONS TO THE CHAPTER 7 MEANS TEST.
As mentioned above, there are a few exceptions to the Chapter 7 Means Test, including the business debt exception. A debtor whose debts are primarily business debts is exempt from the Means Test requirements. The Means Test is intended to apply to consumer debtors.
Consumer debt is typically defined as debts that are incurred by an individual for household, family, or personal purposes. Debtors whose debts are primarily consumer debts must take and pass the Means Test to qualify for a bankruptcy discharge under Chapter 7.
However, Congress did not want to discourage risk-taking by entrepreneurs by severely restricting their ability to file for bankruptcy relief under Chapter 7. Therefore, the Means Test does not apply in cases in which the individual’s debts are primarily business-related debts.
Business debts are typically defined as any debts incurred in the operation of your business. For instance, credit cards used to pay business expenses or purchase items for the company are usually considered a business debt. Amounts owed to vendors, suppliers, and creditors who loaned money to purchase business assets (i.e. vehicles, buildings, equipment, etc.) are business debts.
When determining if the Means Test does not apply because the individual debts are primarily business debts, “primarily” is usually defined as 50 percent or more of the total debt owed by the debtor. Therefore, a debtor may have a mixture of consumer debt and business debt and still be exempt from the Chapter 7 Means Test if the total of business debts exceeds one-half of the total of all debts.
IDENTIFYING BUSINESS DEBT IS NOT ALWAYS SIMPLY.
In some cases, the lines between consumer debts and business debts may be blurred when a business owner co-mingles personal and business finances. Working with an experienced Florida business bankruptcy lawyer is strongly recommended if you are attempting to qualify for a Chapter 7 bankruptcy case by using the business debt exemption. An experienced Florida bankruptcy attorney understands how to maximize business exemptions to help a business owner qualify to file for debt relief under Chapter 7.
Contact an Orange Park Business Bankruptcy Attorney to Discuss Filing for Bankruptcy Relief
If your business is experiencing debt problems, contact The Law Office of Tony Turner by calling (904) 679-2020 for a free bankruptcy consultation with a Florida business bankruptcy attorney.
Bankruptcy lawyer Tony Turner assists businesses and business owners throughout Orange Park, Jacksonville, Lake City, Deland, Augustine, and the surrounding areas explore bankruptcy and non-bankruptcy options for eliminating debt problems.