Reorganizing The Individually Owned Business

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

  1. 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;
  2. Unsecured debts are debts with no liens-such as credit cards;
  3. 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;
  4. 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. The Chapter 13 trustee and the court require that the Business be fully insured.
  6. 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

  1. 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.
  2. 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.
  3. 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.
  4. Chapter 13 cases can be filed very rapidly-sometimes the same day. This is not recommended but is available in an emergency.
  5. 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.
  6. 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.
  7. If  property has been recently repossessed it can be returned upon filing  the case. This most frequently happens with automobiles.
  8. 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.
  9. Leases and executory contracts can either be assumed or rejected.
  10. Frequently, impaired debts can be paid at a fraction of the amount due.

ADVANTAGES OF A CHAPTER 13 COMPARED TO A CHAPTER 11

  1. 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.
  2. 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.
  3. Unlike a Chapter 11 creditors do not get to vote on the Plan.
  4. 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.
  5. 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%

  1. Prepetition taxes including Payroll taxes and income taxes due within 3 years of filing. Also, sales taxes.
  2. Any child support or alimony payments in arrears,
  3. Employee wages up to $12,850 for each worker for the past 180 days.
  4. There are a few others but not common.
  5. 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.

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