Law Tips: Consumer versus Business Cases in Bankruptcy – Part 2

Law Tips: Consumer versus Business Cases in Bankruptcy – Part 2 – To Read Part 1, Click Here

Welcome back to Law Tips. We are in the midst of preparing an individual business owner for bankruptcy thanks to Samuel Hodson and Wendy Brewer, partners with Benesch, Friedlander, Coplan & Aronoff LLP, Indianapolis,

Later, I’ll share a link for the prior Hodson and Brewer commentary on topics such as the importance of being certain that business clients are not treated as consumer debtors in their personal bankruptcies and means testing updates. At the stopping point last week, Sam and Wendy pointed out that: “Returning or selling luxury consumer goods to reduce the consumer side of the ledger prior to filing may save business owners from means testing purgatory.”

Let’s continue this timely discussion of consumer versus business cases. 

The equation can also be massaged on the business side of the ledger. If a business client is a co-maker on a secured business loan, it may be in his interest to file a personal bankruptcy before the property is liquidated and the balance reduced. A debtor with a million dollar home mortgage and a million dollar business loan secured by business real estate could be a business debtor on the morning of the sheriffs sale of the business real estate and a consumer debtor immediately after the sale.

A debtor on the fence between consumer and business status may also benefit from allowing the business loan to incur some default interest, fees and charges before filing his personal bankruptcy. Most business lines of credit have harsh default interest rates. A few months of 18% interest on a million dollar line may make the difference in a debtor’s classification. Since the analysis focuses only on debt and ignores the existence of corresponding assets, the timing of the filing in relation to the purchasing and selling cycle of the business may be important.

For instance, filing just after a regularly scheduled delivery of inventory by a vendor whose obligations are guaranteed by the owner would cause the owner’s business debt to spike while having no impact on his or the company’s balance sheet.

One of the many criticisms of the Bankruptcy Abuse Prevention and Consumer Protection Act  (BAPCPA) is that it creates an incentive for business owners to increase their obligations prior to filing to avoid means testing. Although incurring new business debt to avoid consumer debtor classification benefits a debtor’s 11 U.S.C. § 707(b) analysis, other provisions of the Bankruptcy Code related to bad faith dismissal, denial of discharge and exemption of debt from discharge may be in play if a debtor is too aggressive in his planning.

These expert tips for fulfilling responsibilities to a business owner in bankruptcy are greatly appreciated. Many thanks to our Law Tips contributors for their participation in these two blogs. Should you wish to examine the consumer versus business case issues outlined in last week’s Law Tips, Click Here.

For Video Replays or the Online / On Demand seminar of ICLEF’s popular Annual Bankruptcy Institute that provides a complete examination of this area of law, Click Here.


Thank you to Our Law Tips faculty contributors:
Wendy Brewer, is a partner with Benesch Friedlander Coplan & Aronoff LLP, Indianapolis, where she is vice-chair of the firm’s Business Reorganization Practice Group. She primarily focuses her practice on the representation of creditors, debtors, trustees, and committees in bankruptcy cases and adversary proceedings and the representation of corporate and bank clients in commercial litigation.

Samuel D. Hodson, is a partner in Benesch Friedlander Coplan & Aronoff LLP, Indianapolis, Business Reorganization Practice Group. Mr. Hodson represents debtors, creditors, trustees, committees and receivers in proceedings under Chapters 7, 11, 12, and 13 of Bankruptcy Code, state and federal court commercial litigation, out-of-court workouts, and administrative collection matters with state and federal taxing authorities. Mr. Hodson also counsels business owners in wealth protection planning.

About our Law Tips blogger:
Nancy Hurley, Law Tips blogger, has long-standing connections with Indiana lawyers.  She was formerly a member of the ISBA and IBF staffs for over 30 years. Nancy’s latest lifestyle venture is with ICLEF. We plan to utilize her exceptional writing and interviewing skills while exploring how her Indiana-lawyer background fits with ICLEF’s needs.  When she isn’t ferreting out new topics for Law Tips, her work can be found in our Speaker Spotlight blogs, postings on the ICLEF Facebook page, Twittering and other places her legal experience lends itself.

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