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When Should Debtors Consider Chapter 13 for ‘Business Filings’?

In my post discussing how many people file New York bankruptcy each year, one unusual number jumped out: “business filings” in chapter 13. In 2016, 31 debtors filer in the Southern District of New York, which covers Manhattan, the Bronx, and a few other downstate counties, filed in chapter 13, even though the Statistical Tables for the Federal Judiciary characterized their cases as “business filings.” Normally, chapter 13 is not where debtors turn to for business cases, so what’s going on here?

To be clear, business entities cannot file chapter 13. It’s reserved for human debtors who have an income, and it has some limitations. In particular, debtors must owe less than the debt thresholds to file. As of 2016, those were $394,725 for unsecured debts, and $1,184,200 for secured debts. Debtors whose debts exceed either of these categories must file in chapter 7 if possible, or chapter 11. Chapter 7 debtors must prove that their incomes do not exceed the state’s median family income, and if not, they must take the means test. Chapter 11 debtors do not need to meet any of these requirements.

However, business people can file in chapter 13. That’s not a term in the Bankruptcy Code; it’s just an illustration. The Statistical Tables distinguish “business filings” from “non-business filings” based on the types of debts the debtor owes. Specifically, Section 101(8) defines “consumer debt” to be, “debt incurred by an individual primarily for a personal, family, or household purpose.” If debtors owe debts that are not predominantly “consumer debts,” then the Statistical Tables treat them as “business filings.”

So who are business people here? In almost all cases chapter 13 business debtors are sole proprietors operating under their own names. They often owe debts on equipment that’s primarily meant for generating business income, so chapter 13 can provide them with many advantages. Business debtors might not have sufficient exemptions to protect their business property had they filed in chapter 7. Chapter 13 also permits debtors to cram down loans on secured assets, such as equipment, vehicles, and investment properties.

Chapter 13 business cases will still proceed, and behave like, consumer chapter 13 cases, but trustees will want operating reports, at least until confirmation. Debtors will need to produce three-to-five-year repayment plans, which will need to be confirmed, and the income from these plans will likely come from debtors’ incomes from their regular occupations.

Importantly, even though a chapter 13 business bankruptcy still focuses on business debts, debtors will still need to include all the debts for which they are personally liable. Business entities will need to file separate bankruptcies.

The “business filings” in the Statistical Tables only show situations in which business debts were “predominant.” Many consumer debtors may have significant business debts but not enough to be listed as a “business filing.” Moreover, they are fairly rare. There were none found in the Eastern District of New York in 2016.

If you operate your own business and it’s hitting hard times, then talking to an experienced New York bankruptcy lawyer can help you decide if chapter 13, chapter 7, or chapter 11, is right for you. I’ve handled all of them.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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