The Simplest Save-Your-Business Chapter 13 Case

Here’s how to focus on running your business, by stopping your creditors from taking the wind out of your sails.

In the last few blogs I’ve been talking about some of the extra considerations that come into play when you own a business, are having financial troubles, and wonder if bankruptcy can help. No question—most of the time, having a business adds an extra layer of issues for me to help you work through in deciding whether bankruptcy is the best option, and then putting your case together if it is. But a business Chapter 13 case does not have to be complicated. Let’s take a very simple business situation, and walk it through a Chapter 13 case, to get a practical feel for how it works.

So let’s say Mark, a single 30-year old, started a handyman business when he lost his job three years ago. Before that he’d done about ten years of all kinds of construction and maintenance work, already owned all the tools he needed, and had even taken a few courses at the local community college in small business management because he’d always wanted to run his own business. He had good credit at the time, owed nothing but about $3,000 on some credit cards, plus had never been late on his modest mortgage. Mark had lived all his life in the same city, was the kind of guy who knew tons of people, and had well-earned reputation that he could fix anything. He put a lot of time into putting together a detailed and realistic business plan. He knew he should have some money saved up to get him past the start-up phase, but then the recession hit, he was out of work, and decided it was now or never. Besides, he had $7,000 of credit available on his credit cards if he got desperate.

His business started off slowly, partly because he didn’t have any money for advertizing. But he was creative and worked very hard building a customer base and a good business reputation. His income was creeping steadily upwards, but way too slowly. Over the course of the first year Mark maxed out his credit cards, and simply didn’t have enough money to pay income taxes to the IRS, falling behind $7,000 to them. Then during the second year he managed to service the credit card debt but couldn’t pay it down any, and fell behind another $7,000 to Uncle Sam. Then this last year, the IRS forced him to start making $500 monthly payments on his $14,000 debt, plus the estimated payments for the current year so that he didn’t continue falling further behind with them. As a result he’d gotten spotty on his credit card payments, which jacked up the interest rates and pushed him over the credit limits, piling on all kinds of fees. And now he’s missed a total of 4 payments on his mortgage, putting him $6,000 in arrears.

In the midst of all this his business now has steady—and still slowly increasing—income, Mark enjoys his work in spite of all the financial pressures, and believes he can keep growing it, especially if/when the economy improves. But the IRS has him in a vice, the credit cards creditors are sending their accounts to collection agencies, and his home is heading sooner or later to foreclosure.

A Chapter 13 case filed now for Mark would:

• Stop the pressure by the IRS on the $14,000 debt, by cancelling the $500 payments, and giving him much longer—3-to-5 years—to pay that debt, usually with NO additional ongoing interest or “failure to pay” penalties, thus reducing the total amount to be paid to the IRS.
• Stop collection efforts by the credit card creditors and collection agencies, who would only receive money AFTER he caught up on the house arrearage AND paid off all the taxes, with the amount received depending on what Mark could afford and how much in assets he needed to protect.
• Immediately and consistently protect all his business and personal assets—tools and supplies, his business truck and/or personal vehicle, receivables owed by customers for prior work, and his business and personal bank and/or credit union accounts.
• Allow him to focus on his business instead of his creditors, giving that business much more of a chance at success.
• Get him debt-free–at the end of the 3-to-5 years Chapter 13 Plan, his mortgage would be current, he would owe nothing more to Uncle Sam, and he would have paid as much as he could afford on the credit cards, with the rest written off.

And the business that he loves, and in which he invested so much hope and dedication, would be alive and well.