Chapter 7 Bankruptcy for Small Business Owners and High-Income Earners
CMC Law specializes in bankruptcy filing for small businesses and small business owners.
Individuals can file bankruptcy based on corporate debts. In fact, small business owners receive certain benefits that do not extend to ordinary filers. Individuals who file business chapter 7 are entitled to a discharge of debt and to exempt a portion of property. Further, individuals who file bankruptcy based primarily on non-consumer debts are not subject to scrutiny under the means test. This means many individuals who ordinarily might not qualify for chapter 7 bankruptcy based on high income may still benefit from a chapter 7 discharge. The non-consumer means test exclusion is designed to encourage people to start businesses, with the knowledge that if the business fails, bankruptcy will allow entrepreneurs a second chance.
In contrast to individual business bankruptcy, Chapter 7 corporate bankruptcies are unusual. This is mainly because when corporations file bankruptcy, they are not entitled to a discharge. That means at the end of a business bankruptcy, the debt to creditors still exists, and any litigation regarding the debt can continue, at least in theory. The idea behind filing a business bankruptcy is that the debt to creditors is either settled or otherwise resolved, since the Trustee, an independent party, looks over the business finances and liquidates all corporate assets. After the Trustee insures all assets are liquidated, there is little reason to proceed with litigation against a corporation. Additionally, corporations are not entitled to exemptions like individuals. That means that, while individuals who file bankruptcy get to keep at least a portion of their assets, this benefit does not extend to corporations when they file chapter 7. Because of lack of a discharge and exemptions, business bankruptcies are rare, and often ill-advised. Also, nearly all business creditors require individuals to personally guarantee business debts. If you are personally guaranteed on business debt, there is ordinarily little reason for the business to file bankruptcy, as the creditors can simply pursue the individual guarantor for the deficiency.
In contrast, individuals can file bankruptcy based on corporate debts. Filing an individual business bankruptcy has many benefits. Individuals are entitled to a discharge and to exempt a portion of their property. Further, individuals who file bankruptcy based primarily on non-consumer debts are not subject to scrutiny under the means test. This means many individuals who ordinarily might not qualify for chapter 7 bankruptcy because of high income may still get a chapter 7 discharge. The non-consumer means test exclusion is designed to encourage people to start businesses, with the knowledge that if the business fails, bankruptcy will allow entrepreneurs a second chance.
Likewise, many high-income earners who would not pass the means test may yet qualify for chapter 7 if their debts are primarily non-consumer. Non-consumer debt is not defined by statute, but typically includes debt incurred for a business venture or with a profit motive. Non-consumer debts may include tax debts, personal guarantees on business debts, accident liability, medical bills, and criminal restitution. In some cases, student loan debt has been defined as non-consumer, but this is a case-specific inquiry.
CMC Law specializes in bankruptcy for small businesses and high-income earners. Many bankruptcy law firms incorrectly advise clients they do not qualify for chapter 7. Finally, in cases where individuals do not qualify for chapter 7, they may still be entitled to file bankruptcy under chapter 13, which still has many benefits.