Tuesday, October 25, 2011

Do you have "Consumer" Debt or "Business" Debt

Chapter 13 and Chapter 7 bankruptcies are the most common chapters of bankruptcy filed by individuals.  In order to qualify for a Chapter 7 bankruptcy your income must be below the median income for your family size.  This is referred to as the "means test."

In order to qualify for a Chapter 13 bankruptcy, your total secured debt must be below $1,081,400 and your total unsecured debt must be below $360,475.

What happens if an individual's income is over the median income limit and their debt is over the Chapter 13 limit?  Chapter 11 bankruptcy is an option, but there may be an easier solution.  If an individual's debt is more than 50% from business related debt, the Chapter 7 means test does not apply.  For example:
                      Bob has a family of 3 in Alameda County, CA and has an income of $250,000/year and he has total secured debt of $1,600,000 and total unsecured debt (credit cards) of $25,000.   Bob owns three rental properties in addition to his home.  Bob has a mortgage of $750,000 on his primary residence and the home is worth about $700,000.  The total mortgages on the three rental properties is $850,000 and they are all severely underwater.  

                      Normally Bob would not qualify for a Chapter 7 or a Chapter 13 bankruptcy because his income is too high and his debt is too high.  Here, however, Bob's debt is more than 50% from "Business" debt because the rental properties are considered "Business" related expenses.  

Depending on Bob's financial situation, a Chapter 7 Bankruptcy could alleviate Bob of significant tax consequences or deficiency judgments. 

If you, or someone you know would like to learn more about Chapter 7 or Chapter 13 Bankruptcy, contact our office at 925-454-4460 to set up a free consultation.