In both Chapter 7 and Chapter 13 bankruptcy, you may have to give up your business, even if it’s failing.
Dear Your Business Credit,
I am sorry to hear you have to make difficult decisions like these. My assumption, since you asked what would happen if you file, is that you are considering filing as an individual, so my answer will reflect that.
Before we dive into the answer, let’s take a quick look at these two types of bankruptcy. In Chapter 7, you can eliminate your debt, but it is possible that your possessions will be sold to pay creditors.
A Chapter 13 bankruptcy works differently. It lets you keep your property, but you must make a court-supervised agreement to pay off part or all of your debt within three to five years.
Chapter 7 is the most common form of bankruptcy for individuals. But not everyone is eligible. You must pass a means test in which you are not allowed to earn more than your state’s median income or have disposable income that exceeds a certain threshold. The criteria vary from state to state, but they are designed to limit this route to people who truly cannot afford to pay their debt.
“The means test is employed to give trustees an idea if someone is filing for Chapter 7 to get out of all of their debts to avoid paying them,” says Bryant H. Dunivan, Jr., who practices bankruptcy law from the Law Offices of Michael J. Owen, based in Tampa.
You mentioned that the restaurant is not doing well and wondered if that would be a factor in how it was handled in a bankruptcy. If you have not been earning much income from it, that could help you pass the means test for filing Chapter 7, Dunivan says.
As to whether your restaurant would be vulnerable to being sold, Dunivan said it is hard to give you a precise answer without looking at your exact financials, so he would offer a general one.
In a Chapter 7 bankruptcy, your property is subject to being sold, but you may be able to get exemptions for certain personal property in the means test, such as your home or car, says Dunivan. Often, however, these exemptions are not large. The trustee in your bankruptcy — meaning the person who administers the estate — will have the obligation to make sure you pay the maximum amount of your debts, even if you have to sell your assets and live on a shoestring to do that.
To evaluate your finances, the trustee may ask you for information on your business, such as your profit-and-loss statement and any shareholder agreements you have in place. You could conceivably lose control of it. Let’s say your company is called ABC Burgers LLC, you are a 51 percent shareholder and your shares are valued at $51,000. Those shares may be deemed the property of the bankruptcy estate, says Dunivan.
If you file for Chapter 13 protection, the court will take your net income and break it into monthly income increments, considering anything that puts you above the poverty line as disposable income that can be used to pay your debt, Dunivan says. “The trustee’s primary job is to get as much money for the creditors as possible,” he says.
That can leave you with less income than it takes to support your current lifestyle — which could prompt you to want to sell the restaurant or the property it’s on, if you own that — to raise cash. “It leaves people strapped,” says Dunivan. “That’s where the fight really comes into the court system: whether the plan proposed to the court and trustees fits the actual financial scenario.”
A judge will make a decision on what you must pay, and it may be tough to swallow. The food and housing expenses you will be allowed are standardized by the government, and they may not reflect what the true cost of living in your area is. “I’ve seen it in terms of people’s mortgage payments, where they are much higher than the government says their housing expenses should be,” Dunivan says.
If you file for Chapter 13, trustees will likely keep an eye on your income and request tax returns each year, with the goal of going after any additional earnings from you or your spouse if you are married. “The goal of bankruptcy is to give debtors a fresh start,” says Dunivan. “It’s not to give you a fresh start with a jump ahead.”
Even if you take a second job to earn more or the restaurant starts doing better, you probably won’t be able to use the money to maintain your lifestyle. The trustee is likely to go after it. “If they see the income is going up, they may petition the court,” says Dunivan. “That is why a lot of people can’t follow through on Chapter 13.”
Failures are common in Chapter 13. If you can’t finish the plan, you may be able to convert your case to Chapter 7, which will involve selling off assets. Or your case could be dismissed, meaning you’ll still owe your original debt, plus retroactive interest.
My advice to you is to think very hard about whether there is some other way to tackle your debts besides filing for bankruptcy. Both of these options come with steep personal costs.
A maneuver like selling a house and moving to an apartment to pay down your debts may seem drastic, but it could be less painful than either Chapter 7 or Chapter 13. Make sure you get good legal advice to guide you. And keep reminding yourself that someday, this will be a distant memory. What you’re going through is not easy.