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Are business owners subject to the "means test"?

A previous post on this blog discussed how a bankruptcy can help a sole proprietor, that is, a person who conducts business in his or her own name and does not incorporate, manage their business debts and keep their enterprise afloat while they reorganize.

Bankruptcy is also beneficial for business owners who chose to incorporate or otherwise organize their business. This is because most banks and creditors will require individuals who own a business, even if it is incorporated, to sign documents promising to pay all business loans if the business fails. These documents may even require a person put up his or her house or car as collateral.

Therefore, a person who sees his or her business fail, even if they incorporated it, may find themselves in a major financial jam and have creditors calling them or threatening to sue or try to get their collateral back.

It bears repeating in this respect that the Chapter 7 process is a little bit easier on those who are filing bankruptcy primarily because of business debts.

By way of background, a person who files a Chapter 7 is ordinarily going to have to go through a "means test." The means test considers what a Tennessee debtor has made and spent over the last several months. If the amount of income is high enough, then the debtor is legally forced to choose between withdrawing their bankruptcy or proceeding under a Chapter 13 repayment plan instead, an option which is just not right for everybody.

These rules, however, only apply to Bradley County residents who have accumulated primarily personal and consumer debt, like a car payment, medical bills or credit cards. In other words, if a person can show that the majority of his or her debts are business-related, then that person can get the benefit of faster relief under a Chapter 7 bankruptcy.

For families in Tennessee who took a bet on starting a new business and wound up stuck with a bunch of business debt, Chapter 7 is available to them without regard to the means test.

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