Sinbad’s Bankruptcy or Why Consumer Debt vs. Business Debt is Important

As some of you may know by now, Comedian Sinbad recently filed chapter 7 bankruptcy. If you look at his bankruptcy schedules, you might wonder how a person making $16k per month file a chapter 7 bankruptcy.

On the first page of your bankruptcy petition, it asks if your debts are “primarily consumer debts” or “primarily business debts”. For this question, primarily means more than 50%.

If you can demonstrate that your debts are “primarily business debts”, things get easier in your chapter 7 bankruptcy. First off, you don’t need to complete Form 22A aka the Means Test. It also makes it very difficult for a party to dismiss your case for making too much money. Sinbad makes decent money and has multiple car leases that might be considered excessive, but that alone won’t be enough to sustain a 707a dismissal.

Preparing for a Small Business Bankruptcy – Who can you pay?

Your small business is not doing so well; in fact you have reached the point where you need to shut the doors and stop all business operations. Presuming that the company has some significant debts, which in all likelihood is one of the reasons you have decided to close shop, you decide that you will file a Chapter 7 bankruptcy to discharge all the obligations. Once you come to this realization, there are many considerations to ensure everything is done properly. I will discuss what I have found as a small businesses bankruptcy attorney to be the two most significant ones. First, you need to decide which of your vendors and suppliers you can pay before you file for bankruptcy. Second, you need to decide what you will do with your business assets, and where they go now that you will not be using them in commerce.

Let’s take a look at the first issue. You still want to make as much money as possible while winding up the business, so you decide certain vendors need to be paid something in order to either keep them off your back to stop a law suit, or because you need them to continue to provide services. The transfer or sale of inventory and paying one creditor over another is a preferential payment and a significant problem. The key to this is that, in the 90 days prior to filing for bankruptcy you can not pay an unsecured creditor for past services. In fact, unless the payments are in the ordinary course of businesses, it must be for services rendered in the 90 day period prior to filing. Essentially, you must be paying only for new bills not old ones. If you do pay them, then the Chapter 7 Trustee may sue your creditors forcing them to turn over the payment. The reason for this is that in the 90 days prior to filing bankruptcy, you can not choose to pay certain creditors in the same class as others who are not receiving funds on their invoices.

The second concern that many Debtors face is what to do with your office equipment, and other business tools. You may want to try to sell off some of these to raise capital to keep the business going for a little while longer, but you need to ensure that if you do sell anything, you get fair market value, in order to protect against a claim down the road for a fraudulent transfer. Additionally, you need to be exceptionally careful about transferring an asset to a family member, owner or even an employee of the business. These types of transfers to insiders will be especially scrutinized by the Trustee.

Many small business owners will say, so what, it’s not my problem, the Trustee is not going after me. While hold on there cowboy, you may be getting out of the business now, but your future is uncertain. What if you decide to step back into the entrepreneurial world again? You may need your old contacts, and if your actions caused someone to get into it with the Trustee or worse yet incur legal bills those vendors may not be too quick to work with you in the future.

Additionally, if you have already made one of these preferred transfers, and are intent on filing the bankruptcy before the period of time expires, then you must be sure to disclose it on your schedules. If you fail to do so, the Trustee could possibly object to your company’s discharge and claim that the filing was not done in good-faith. The bottom line is at this stage, you need to protect yourself by simply being as honest as possible.

This article about prepping your business for Chapter 7 bankruptcy was written by Attorney Michael Goldstein, of the Phillips Law Offices, who practices bankruptcy law in Massachusetts just north of Boston.