If you’ve already closed down your unsuccessful business, or are thinking of closing one you are now operating, you no doubt are wondering about the best way to deal with the debts that are now saddling you from that business. The answer depends on many factors, including the type of debts that you owe. Here are the main types of business debts, and how Chapter 7 and Chapter 13 would each deal with them.
Income and Withholding Taxes
Very often the closing of a business leaves the owner personally liable on some or all of the business’ tax obligations. The owner often has his or her own personal tax obligations which he or should could not pay during the months and years that the business was struggling. This usually happens when the business had generated enough money for the owner to get some taxable income from it, but not enough to meet all personal living expenses much less enough to pay the taxes on that income.
Whether you owe back taxes, how much, and what kind are often the most important questions in deciding whether to file a “straight bankruptcy” Chapter 7 case or instead an “adjustment of debts” Chapter 13 one. And that’s particularly true after closing a business because so often taxes are owed at that point.
Chapter 7 tends to be the better choice if 1) the taxes owed can ALL be discharged (legally written off), or 2) if the taxes not qualifying for discharge are relatively modest in amount, and can be paid off through a manageable monthly payment plan with the IRS or other tax agency.
However, if the taxes which do not qualify for discharge are very large, and especially if they span a number of years, then Chapter 13 tends to be the better choice. That’s because Chapter 13 provides a number of advantages that become more worthwhile when more taxes are owed and more help is needed in dealing with them.
For example, under Chapter 13 you are protected from the IRS’s and the New Jersey Division of Taxation’s collection efforts throughout the three to five years that the case lasts. You have that length of time to pay those taxes which must be paid. The payment amounts are based on what you can afford to pay, not on what the IRS or the Division of Taxation demands. Interest and tax penalties do NOT continue to accrue in most situations. You can often pay other personally important debts—such as a vehicle or mortgage arrearage or payment—ahead of the taxes. Also, if your circumstances change during the three-to-five-year period, usually adjustments can be made to your payment amounts, again based on what you can afford to pay.
In a nutshell, if you can reasonably pay the taxes you owe as a result of your business closing after discharging all or most of your other obligations (including maybe some of the taxes), then Chapter 7 may well make more sense. Otherwise, you probably need the stronger medicine of Chapter 13.
Debts Secured by Business Equipment
Most of the time when a business has debts secured by collateral—such as business equipment, inventory, or receivables—when the business closes it surrenders the collateral to the creditor, and the remaining debt is treated as a “general unsecured” debt. (See the next section.)
But you may want to keep certain collateral—such as a business vehicle or tools that you will need for your future livelihood. Assuming that the collateral is titled in your name (usually the case if your business was a sole proprietorship and not a corporation), and also assuming that you are personally liable on the debt, then if you are current on this debt you will likely be able to keep the collateral. You just have to agree to continue making payments and to continue being liable on the debt. This can usually be done through a Chapter 7 case.
However, if you are not current on the secured debt, and can’t get current quickly, you may need Chapter 13 to retain the collateral. This option will almost always give you more time to catch up. Or in some situations, you may not even need to catch up on the payments, and may even be able to keep the collateral for much less than what you owe on it.
So, in some situations you can keep the collateral under Chapter 7. But if not then you would likely benefit from the extra tools that Chapter 13 provides.
“General Unsecured” Debts
Debts which are not secured by collateral, and also do not fit in any of the categories of “priority” debts (such as recent income taxes) are called “general unsecured” debts. These are usually discharged in both Chapter 7 or Chapter 13. As such they do not generally push you towards either option.
There IS a limit on how much general unsecured debt you can have in a Chapter 13 case—a maximum of $383,175 (up until the next scheduled adjustment for inflation on April 1, 2016).
Also, general unsecured debts are generally discharged under Chapter 7 without you paying anything on them (except in the unusual situation that some of your assets are not exempt and are sold by the bankruptcy trustee to pay creditors). But in a Chapter 13 case you may have to pay a portion of the general unsecured debts. Whether you do and how much depends on your budget and how much other more important debts have to be paid ahead of them.
If you have closed a business or are considering doing so, have significant resulting debt, and live in New Jersey, we can help you decide whether Chapter 7 or Chapter 13 is more appropriate for you. The Law Office of Andrew B. Finberg can help you decide between and then represent you under Chapter 7 or Chapter 13. Please contact us to schedule a free, no-obligation consultation by calling (856) 988-9055 or by using this form . We look forward to helping you to a fresh financial start.