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Business Debt Vs. Consumer Debt

The following entities may file for chapter 7 and chapter 11 bankruptcy protection: an individual; a married couple as a joint bankruptcy filing; partnership; corporation; limited liability company; individual / a/b/a. In general, there are additional requirements for each entity under the chapter 11 filing. Only an individual may file for chapter 13 bankruptcy protection. However, an individual that is not incorporated may file, as a d/b/a. In other words, if a person is doing business as “John Doe Pizza Restaurant” without incorporating, the individual may file a chapter 13, in connection with business debt. However, the filing must be in the individual’s name, including the alternate name “John Doe Pizza Restaurant.”

Any bankruptcy filing by a business entity, such as a partnership, LLC., S Corp. or C Corp., relates 100% to business debt. If an individual is not incorporated and is “doing business as” a separate name, the bankruptcy filing relates to the individual that owns the business and the business. Therefore, the bankruptcy creditors include all of the business creditors and all of the individual’s personal consumer debt. Under these circumstances, the code will not permit the business to file without the individual

The term “small business” has specific meaning with regard to a chapter 11 bankruptcy case. A chapter 11 “small business” means any of the above listed entities that can file a chapter 11 that is engaged in business activities with of secured and unsecured debts in an amount that is equal to or less than $2,000.00. There are specific laws that apply only to a chapter 11 “small business debtor”.

The bankruptcy code specifically defines a “chapter 13 debtor engaged in business” as a self employed person who borrows money for the business, in connection with their income.

A chapter 13 case may be characterized as a business case for purposes of providing proof of income. A chapter 13 trustee will characterize a case as a business case for purposes of proving income, if the debtors’ income is paid in a form other than as a w-2 employee. This includes an independent contractor and a landlord. All business debtor’s involved in a chapter 13 bankruptcy must complete a profit and loss statement in connection with their income.

There are a number of New Jersey bankruptcy laws that apply to a consumer bankruptcy that do not apply to a business bankruptcy filing. A consumer bankruptcy filing is an individual who’s debt is more than 50% consumer debt. A business bankruptcy filing is an individual or business entity with business debt representing more than 50% of their total debt.

If the majority of the debtor’s debt is business related, the debtor need not be subjected to the “Means Test” or “Statement of Current Monthly Income” analysis. Under this scenario, the debtor need not complete the analysis. The means test is the analysis that consumer debtors must complete to determine whether they meet the chapter 7 criteria. Also, chapter 13 debtor’s must complete the analysis to determine the amount that will be paid to unsecured creditors, if any. In a business case, the criteria regarding monthly disposable income is based on a separate analysis.

The bankruptcy code specifically states that consumer debt, not business debt, in the amount of $500.00 for luxury items, for goods or services, incurred within 90 days of the bankruptcy filing is presumed to be nondischargeable. Also cash advances in connection to consumer debt, only, incurred within 70 days prior to the filing is presumed to be nondischargeable. The bankruptcy code only requires a consumer debtor, not a business debtor, to obtain credit counseling briefing, prior to the bankruptcy filing. Furthermore, only consumer debtors must take a Financial Management Course, prior to discharge. If a vehicle is considered a work vehicle for a business, the laws permit the debtor to pay for the vehicle in a different manner, as compared to a vehicle financed by consumer debt financing.

Contacting a New Jersey Bankruptcy Lawyer

If you are considering filing for bankruptcy in New Jersey and especially if you have questions or concerns about how bankruptcy may affect your business, you should contact an experienced bankruptcy lawyer. The NJ bankruptcy attorneys at The Law Offices of Robert Manchel know the bankruptcy laws and are familiar with local judges and their interpretations of the bankruptcy code. Call today for a free consultation.