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.
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