Businesses owned solely in an individual’s name or owned by a married couple might well look to reorganize through a Chapter 13 bankruptcy. There may be a time when the business is being crushed by debt but could go forward profitably if debts were prioritized and in many cases substantially reduced.
Chapter 13 is only available when the business is owned individually (or by a married couple) with secured debts of less than $1,184,200 and unsecured debts of under $394.725. Corporations and Partnerships are not eligible to file a Chapter 13.
Businesses who file a Chapter 13 have tremendous advantages over a corporation filing a Chapter 11. It is cheaper, faster, more streamlined, and gives greater power to the Chapter 13 Debtor. Generally, there are fewer court fights in a Chapter 13.
The key to filing a successful Chapter 13 is being well organized and prepared at the time of filing and even before the actual filing of the case. That is why having an experienced lawyer who concentrates in Bankruptcy law is so important.
DEBTS HAVE TO BE CLASSIFIED
- Secured debts are debts where property has been pledged as collateral. This can be a car or truck that has been financed or perhaps restaurant equipment that has been financed;
- Unsecured debts are debts with no liens-such as credit cards;
- Priority Debts have been given a higher status by law that has to be paid in full. These debts include Payroll taxes; recent income tax debts; and sales taxes;
- Special class Debts are debts that you choose to pay in full such as co-signed debts where you want to protect the co-signer.
THE REQUIREMENTS FOR AN INDIVIDUAL BUSINESS OWNER TO FILE A CHAPTER 13 TO REORGANIZE:
- The individual must have a regular source of income. That can be from the business or some other source and can include a spouse’s income. Business owners don’t get paychecks like a normal employee (although a spouse may) so evidence must be produced showing income and expenses for the past several months.
- Any Chapter 13 plan must in the “Best Interest of Creditors.” This means that general unsecured creditors will receive an amount through the Chapter 13 as much as they would receive if property were liquidated.
- The payments made into the plan must satisfy the “Best Efforts” test anytime less than 100% is being paid to general unsecured creditors. This means that all of what’s determined to be disposable income, for the Debtor and family, must be paid into the plan.
- The Debtor must provide proof of federal income tax filings for the prior 4 years. An affidavit will suffice if the Debtor was not required to file income taxes for one or more of the years.
- The Chapter 13 trustee and the court require that the Business be fully insured.
- All schedules filed with the case must be detailed and honest to provide assurance that the plan will treat creditors fairly. In other words it must be a good faith filing.
THE BENEFITS OF A CHAPTER 13
- The filing of a Chapter 13 imposes the powerful Automatic Stay against all creditors including the IRS from taking any action to collect pre-filing debts. It provides a powerful immediate relief. The Automatic Stay also prevents threatened repossessions and garnishments.
- The costs including the filing fee and lawyer’s fee are very reasonable; a low down payment allows for the Chapter13 to be filed as the court filing fee is only $310. The majority of attorney’s fees can be paid through the plan whereas there is generally a large down payment towards attorney’s fees in a Chapter 11 as well as a hefty filing fee.
- Individual business owners are generally not required to fill out the Means Test. The exception being if consumers debts (and home mortgages are considered consumer debts as well as the balances on student loans) are greater than the business debts.
- Chapter 13 cases can be filed very rapidly-sometimes the same day. This is not recommended but is available in an emergency.
- A Chapter 13 plan is in a much better position to cram down undervalued secured property and impair unsecured debts. In other words, let’s say, a printing press is worth $10,000 with $15,000 debt. Just the value can be repaid rather than the amount owed.
- A Chapter 13 allows you to get rid of unwanted property. One can owe a great deal of money on a “junk” car or possibly an antiquated piece of machinery. The secured debt can be converted to an unsecured debt.
- If property has been recently repossessed it can be returned upon filing the case. This most frequently happens with automobiles.
- The tax man may be at your door but in a Chapter 13 the IRS and other tax debts can be paid over a long period of time.
- Leases and executory contracts can either be assumed or rejected.
- Frequently, impaired debts can be paid at a fraction of the amount due.
ADVANTAGES OF A CHAPTER 13 COMPARED TO A CHAPTER 11
- In a Chapter 13 there are no Creditor’s Committees. Chapter 11 Creditor Committees are expensive and they are most frequently at odds with the Debtor which in turn is the cause of frequent and expensive litigation.
- In a Chapter 13 only the Debtor can propose a Plan. In a Chapter 11 there can be competing Plans that can be offered by Creditors.
- Unlike a Chapter 11 creditors do not get to vote on the Plan.
- In a Chapter 11 the United States Trustee oversees the case from start to finish. In a Chapter 13 trustees generally oversee the case through confirmation and monitor payments thereafter.
- In a Chapter 11 the Debtor must submit monthly reports on income and disbursements from the time the case is filed through the confirmation of the plan.
DETAILS AND POSSIBLE PROBLEMS IN A CHAPTER 13
As in the case of a Wage Earner Chapter 13, each client has individual problems. Your lawyer should be experienced and resolve specific problems on each case.
SECURED DEBT
In most instances the balance of property secured by a lien is greater than the value of the asset upon which there is a lien. For instance, a truck or an automobile that was purchased and financed specifically for the business has a balance of $25,000 while the retail value of the automobile is $15,000. In a Chapter 13 the Debtor must pay the $15,000 over time with an interest rate currently between 5 and 6%; the excess $10,000 is an unsecured debt.
In a Chapter 13 unwanted secured property can be surrendered and the balance converted to a general unsecured claim. You can get rid of a “junk” car. Or, a restaurant owner might be able to replace some of his/her equipment very inexpensively allowing for more expensive equipment to be given back and the debt treated as unsecured.
PRIORITY DEBTS
There are certain debts that must be 100%
- Prepetition taxes including Payroll taxes and income taxes due within 3 years of filing. Also, sales taxes.
- Any child support or alimony payments in arrears,
- Employee wages up to $12,850 for each worker for the past 180 days.
- There are a few others but not common.
- Student loans are treated as a general unsecured debt but the debt is not discharged even when the Chapter 13 case is discharged. Also, interest on the loan accrues while in the Chapter 13. Some Chapter 13 debts treat student loans as a long term debt and then maintain the current monthly payments.
LEASES AND EXECUTORY CONTRACTS
Leases and executory contracts must either be assumed or rejected. How one treats these leases and executory contracts depends on the circumstances and how good of a deal the lease is.
If one is current on the lease and/or executory contract, and wants to keep it, then the lease may carried on uninterrupted by assuming it.
If one has, let’s say, an expensive lease and can easily move to a lower rent place for the business it can be rejected and anything owed is an unsecured debt.
But there are instances where one cannot really move and the Debtor is behind of the rent. A restaurant or grocery store is an example. The Bankruptcy Court provides Landlords with special protection. The back rent or arrears must be cured either within 60 days or if it can’t be cured in 60 days the court will establish what is a reasonable time-generally only adding a few more months.
The time period to cure the default may largely depend on the circumstances and the leverage of the parties. If the Landlord is successful in evicting the tenant the case will likely be converted to a Chapter 7 and the landlord will likely get nothing. Also, it may remain vacant for several more months.
OTHER REQUIREMENTS TO BE CONSIDERED
Assets: In a Consumer Chapter 13 assets are generally not filled out in detail. One does not list every chair, table, bed, TV, etc. Depending on the business the Chapter 13 trustee and the court will want a comprehensive inventory of property. When practical it should be completed with the services of an appraiser. Ideally a Balance Sheet should be prepared by an Accountant or bookkeeper.
Ongoing value: Is there a “good will” component of the business? A self-employed computer consultant probably doesn’t have a saleable “good will” component. On the other hand a restaurant may have a value in excess of its assets.
Since the individual business owner does not receive a pay check a Chapter 13 trustee wants to have schedules that show future earnings and future expenses. Again, if practical, the services an accountant would be helpful.
SUCCESS
With the help of an experienced lawyer and with all schedules well prepared, the Chapter 13 trustee should be satisfied with the case. Chapter 13 trustees generally want plans to work.
If the Chapter 13 trustee is satisfied with the case and when possible problems with creditors have been resolved the court will likely confirm the case.
The Business owner who has his/her case confirmed can now focus solely on the business and work for increased profitability. When the case has been completed and discharged the amounts paid each month to the Chapter 13 can now go into your pocket.