High Income Earner & Business Debt

[Deepindebt83]

My husband and I both work full time. We make around $240k gross together, we have 3 kids. We have $300k in unsecured debt. Yes in credit cards and unsecured loans, $300,000. This began many years back we’ve paid it down and then it creeps right back up and we are in a vicious cycle.
We also own a small brick and mortar business that we have poured into financially over the last 2+ years. It has been in the red for the last two years and is finally turning a corner. However it’s a little too late. We are drowning in our personal monthly payments. The unsecured debt alone is over $6000 in minimums. We started buying for our business (retail/thrift type store) long before we even opened. We estimate that at least $100k of our debt is business debt. Possibly more. Would it possible for us to qualify for a Chapter 7 with the business? Even though we are above the means amount? If so how far back will I need to provide proof of what is business debt? Does anyone know what proof is required? Receipts? Statements? Thank you for your help.

[justbroke]

It is possible that you can qualify for a non-consumer Chapter 7 bankruptcy; I did! You need to be able to show that 51% of your debt is not consumer debt. If you charged the business debt on personal credit cards then it may be a little more of an issue proving it was all business. If you have well-maintained GAAP records (generally acceptable accounting practices), then it makes it easier (I always maintained GAAP records in my business). If you have a lot of commingling going on, it may be difficult to parse.

Or, the Trustee and. United States Trustee (UST) will be able to quickly determine that it's mostly business debt.

How is your business organized? Incorporated, general partnership, LLC, LLP, or is it a sole proprietorship? Did you borrow against your home for your business? Is it readily traceable to the business? Did you get SBA loans?

[Deepindebt83]

Thanks for replying!
All records have been kept since the business opened two years ago. It’s a sole proprietorship. However, before we officially opened the business, we spent a lot of money preparing for opening the business. Sourcing inventory and then we did a build out on the building that we leased as well. So those things are all on personal credit cards.

We do have business credit card debt that equals about $25,000 in debt. And then we have a disaster SBA loan that is $25,000. Those debts are the only ones directly linked to the business As they are attached to the business. But we have definitely used our own personal credit to keep it afloat many many times.

[justbroke]

I would find a good local attorney that has done non-consumer bankruptcies with an active soleprop business. It is certainly something that can be done. The question is just showing that it's > 50% business debt. Not insurmountable but documentation and good recordkeeping will be important. Perhaps your income tax returns over the last few years, on Schedule C, clearly show the business debt.

[Deepindebt83]

Do you recall exactly what they looked for on your business and credit card statements? Did you have to itemize what was personal and what was business?

On our tax return For 2023 we show a $30k loss on Schedule C. For 2022 only a $7k loss. This year will likely show a $18k loss. That doesn’t really reflect our high debt though.

[Deepindebt83]

And I am meeting with a local bankruptcy attorney that is board certified in business. We already spoke to one bankruptcy attorney and she acted like the business didn’t even matter and went straight to Chapter 13. So I’m hoping someone who has worked with small business has some ideas. Thanks again for commenting.

[justbroke]

Mine was easier to calculate because I had personally invested in real property. The home in which I lived and was my homestead, of course, was counted as personal debt. However, the investment properties and the IRS debt far exceeded my personal debt. I also had unsecured business debt--personally guaranteed--of about $60K at that time.

If you funded this through personal credit cards, you will need to show that connection... through some sort of accounting of the purchases. If you commingled business and personal, that becomes more difficult but not insurmountable. If the UST is going to have an issue, it's going to be with the purchases made on the consumer cards and how to differentiate consumer versus non-consumer purchases.

Bottom line for me, they didn't look to credit card statements. They looked at the claims. They looked at the total of the non-consumer claims and compared that to the consumer claims. In my case, the math was very easy as I had much more non-consumer claims than consumer claims. I did not need to itemize purchases from a consumer credit card statement or statements.

Oh, I didn't ask if you owned a home. Remember the mortgage(s) on the primary residence, loans on cars, and other personal debt will count as consumer debt. You mentioned that you had bout $100K of unsecured debt on cards, but said you had $300K in total unsecured debt. That doesn't get you over the 51% and we haven't even talked about a home mortgage or vehicle loans.

[Deepindebt83]

Ahhh I see. I didn’t even think about our home and cars being apart of that debt. Welp sounds like we will be paying it back in a 13. I have the consult with a lawyer today, but preparing myself for that. Thanks again.

[justbroke]

You never know until you do all the math. Maybe it will be enough. During your consultation they will be able to better pinpoint the "non consumer" debt. For example, back taxes owed to the government are not "consumer" debts and some bankruptcy districts even consider student loans to be "non consumer" in nature. Some of it will depend on how your district treats certain things. Best of luck to you.