Many of the clients that we assist here at the Law Office of Paul Petrillo are small business owners in Salem considering bankruptcy as a form of debt relief. Many are contemplating a Chapter 7 bankruptcy, yet are concerned about passing the means test. The Chapter 7 means test is a guideline set forth by Congress to determine whether or not one could reasonably afford to repay his or her debt. If you run a struggling small business, you may be relieved that to learn that Chapter 7 bankruptcy could still be a viable option for you. In fact, information compiled by the Bankruptcy Data Project shows that 37,188 businesses petitioned for Chapter 7 protection in 2012.
The means test compares your income to that of the median income of your state. If your income is above that average, then you typically can’t file a Chapter 7 bankruptcy. However, in cases were the vast majority of your debts are business-related, then the means test does not apply to your situation.
The challenge in filing for a Chapter 7 bankruptcy if you’re a small business owner is distinguishing between business and personal debts. Liabilities such as outstanding invoices, business tax obligations, or business credit card accounts are usually easily grouped into the category of business debt. However, you may encounter difficulties in including credit cards among your business debts if the cards were used for both personal and professional purposes.
Another potential obstacle to your qualifying for the business debt exception is your mortgage. You’re typically only able to classify it as a business debt unless it was bought as a business investment property or originally purchased for business use.
Further information on qualifying for Chapter 7 bankruptcy for businesses may be found on our site.