[COLUMN] Business failure causes debtor with good income to seek Chapter 13 relief

THE client is a single mom and a professional with good six figures income. In 2018, a friend approached her with a business for sale. The client had never been in business before but was interested in the prospect of making more money.

According to the sellers of the business, it makes a net profit of $10,000 a month. The business is an established local retail that provides a service. Enticed by making another $10,000 a month, the client bought the business. She obtained a working capital line of $100,000 and put in another $25,000 of improvements. In addition, she took over the commercial lease of $6,000 a month with four more years to run. Her friend acted as the industrial partner to run the business since client was employed full time in her profession. She was off to a rocky start.

The net profit of $10,000 a month was nowhere to be seen. At best, the business was breaking even. Then, in 2020, the pandemic came and wiped out small retail businesses. The client’s business was not spared. It was in the hole $5,000 a month, which had to come out of the client’s pocket.

Even with her six figures income from her profession, doling out $5,000 a month to keep the business afloat was daunting and stressful for her. In addition, the business line of credit required a monthly payment of $2,000. That’s $7,000 of out of pocket expenses that client did not have before when she had no business.

Well, you know how it is. This is how life is. You make a mistake, thinking you will create $10,000 more of net income for yourself with the business, but instead, it is sucking $7,000 out of your wallet. Since she kept the business alive by shouldering the loss for three years, she has lost $250,000 of her hard earned money from this simple mistake. Well of course, she now takes a long hard look and decides that she enough is enough, and that even if the business is now improving a bit as COVID becomes under control with the vaccines, she doesn’t want to have the business in her life anymore. Time for a divorce.

Of course, she would like to get Chapter 7 relief to just wipe out the $100,000 business credit line and $150,000 more of commercial lease for the next two years, but due to her above median income, she would not be eligible for Chapter 7 relief even if the equity in her house is way below the exemption amount of $600,000.

Chapter 13 will allow her to pay a portion of what she owes which will be much less than her $7,000 monthly loss that she has been experiencing for three years.

How much she pays in her Chapter 13 plan will depend on her monthly deductible expenses under the means test. It can be as low as $150 a month. If she had a family of four, she would have more allowable expenses to deduct so she would pay less, than if she had a family of two because she would then have less allowable expenses to deduct.

Each case is different. The actual payment plan depends on many factors.

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Disclaimer: None of the foregoing is considered legal advice for anyone. Each case is different.  There is no absolutely no attorney client relationship established by reading this article.

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Lawrence Bautista Yang specializes in Bankruptcy, Business, Real Estate and Civil Litigation and has successfully represented more than five thousand clients in California.  Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South, Suite 10042, Alhambra, CA 91803.

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