Just like any other bankruptcy case, when a business owner files for bankruptcy protection he must submit a means test worksheet. The means test is a qualifying calculation for Chapter 7 bankruptcy. Earn too much money, and lose your ability to file Chapter 7. Failing to accurately account for your income may result in a higher monthly Chapter 13 plan payment, or the trustee may move to dismiss your bankruptcy case altogether.
Determining a six month income average for the means test calculation is often difficult for a business owner. Usually the business owner does not receive a monthly paycheck from the company. Consequently, the bankruptcy trustee looks to the company records, like profit and loss statements and business bank accounts, and compares these records to the debtor’s personal bank accounts. It is very, very important to accurately account for your business finances during the six months leading up to bankruptcy. Depending on the complexity of the case and the dollar amounts at issue, it may be prudent to higher a CPA to organize your finances prior to bankruptcy.
Bankruptcy trustees pay special attention to business owners because of the temptation to “cook the books” prior to bankruptcy. Some business owners will reduce their salary and business distributions to pass the means test. This can be problematic because undistributed money sitting in a business bank account increases the value of the business. This can put the debtor’s interest in the business at risk during a Chapter 7 liquidation. Of course, if the business has its own debt, cash in a business bank account will be off-set against this debt and will not create value for the debtor’s bankruptcy estate.
Another way business owners try to manipulate the means test is to delay sending bills to customers. In other words, the business receives a great deal of income after the business owner’s bankruptcy is filed. Technically this is no help because any billable work, goods, or services are business assets even if no invoice is sent. Finally, some business owners will stop working in order to reduce income. These tactics can be a dangerous game of chicken with the bankruptcy trustee.
If you are a business owner and need personal bankruptcy relief, discuss your situation with an experienced bankruptcy attorney. The federal bankruptcy laws can help you restructure or eliminate your debts, and your attorney can help you plan for your bankruptcy and shelter your business.