Recall that debtors can use irregular incomes to their advantage to avoid taking the chapter 7 means test. (In New York bankruptcy, the median family income is $49,632 for a family of one and goes up from there for each additional family member.) The linked post gives as an example an individual who was about to transition to a higher-paying job. He filed in chapter 7 before his new job increased his average monthly income to keep it below the state’s median.
The question, though, is what about self-employed workers who own businesses and have accumulated large personal debts? Arguably, their irregular incomes give them a good reason to stay out of chapter 13, which really is designed for wage-and-salary employees. Can they manipulate their incomes downward to stay in chapter 7?
The answer, as with debtors with irregular incomes, is yes, but unlike someone switching jobs or a seasonal worker with clear, unpaid breaks, it’s not as sure a bet. Here are a few examples of some tactics self-employed debtors try:
- Debtors with incorporated businesses can reduce disbursements to themselves to reduce their monthly incomes. The caveat is that any cash reserves a business builds up becomes assets to the business, and because debtors are usually the sole owners of their businesses, the cash reserves are imputed to their ownership interests. The trustee might attempt to liquidate that to get at the cash.
- Using the cash in the business to prepay the business’s debts, if it has any, might work better. The downside is that the money is gone, and if the business ever needs to file bankruptcy, the payments might be considered preferences. On the bright side, so long as the business is a net debtor, then the trustee is less likely to go after it if has a large cash reserve.
- The other option is to arrange delaying payments to a business, i.e. not sending out invoices. The problem with this option is that the receivable is created when the work is completed, not when the invoice is sent out.
- Alternatively, it might be possible to work on multiple projects but not complete any of them, assuming the business is paid on completion. This will probably rub against client demands, however.
Depending on how the business operates, it might be possible for the owner to file a chapter 7 personal bankruptcy and manipulate his or her income to avoid the means test. The only sure way to prevent any problems with the trustee is not working at all. With such a sensitive matter as using income to one’s advantage, it’s especially important to consult with an experienced New York bankruptcy lawyer to avoid making big mistakes.
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 bankruptcy automatic stay Bruce Weiner for a free initial consultation.
