When Business Owners Should File Bankruptcy
A few days ago I posted To File or Not to File talking about my decision making process when I consult with a client. When a client is filing because of business debt then there are other considerations. A business owner may opt for a personal bankruptcy because they cannot obtain a discharge of debt if their business filed a Chapter 7 and because Chapter 11s are incredibly expensive. So, I must decide if the owner debtor can filed a personal Chapter 7 even if their personal household income is healthy.
Some jurisdictions use a “totality of the circumstances approach that looks at both the numbers of creditors who are business creditors and also the amount of business debt. In Kentucky (part of the Sixth Circuit), it is a more mechanistic test as to whether 51% of the debt is business debt. If so, then even if the debtor does not pass a means test to do a Chapter 7, they can still file a Chapter 7.
A caveat to the rule above is that debts on residences are going to be consumer debts and not business debts. Another one is that student loan debts are consumer debts rather than business debts. So, even accounting for those debts, if there is 51% business debt and even if the household has a healthy income, the business owner can file a personal bankruptcy. The business itself will need to be dissolved and wapped up.