December 9, 2019

Chapter 13 Plan Strategies for Self Employed Debtors

With an increased emphasis in the new Bankruptcy Code upon a debtor’s income history, self-employed or commissioned sales debtors will find a hostile reception in Chapter 13.  A recent case on which I have been working illustrates the problem.

My clients are self employed real estate agents, both in their 60’s.  Residential real estate sales can be a good business, but it can also be cyclical – with some months yielding a nice income and other months completely dry.   In this case my clients had close to $100,000 in credit card debt and close to $200,000 in income tax debt.

As an aside, real estate agents often have income tax problems because of the nature of their income.  Funds are not always there when it comes time to pay quarterly estimates – the estimated payments are based on the previous  year’s income.  In addition, the sales cycle of listing to closing may be four to six months, which means that cash flow can be a problem.

In this particular case, we had to file earlier than I would have preferred because we were trying to beat the filing of a tax lien.  Most of the tax debt in this case was "stale" for bankruptcy purposes, meaning that we could treat it as unsecured debt.  Once a lien was filed, we would be stuck paying the entire amount as secured debt.

The problem we faced arose from my clients’ income in the six months prior to filing.  The spring and summer months were realtively good for income purposes, resulting in an average monthly income that had no basis in current reality.  This fall and winter had been very poor months for home sales, perhaps because of the rise in interest rates and tightening of mortgage underwriting standards.

When we ran a "means test," the calculations showed that my clients had close to $2,000 per month in disposable income.   The problem – in November, my clients’ gross income was just short of $2,000.

I suggested that we consider a "step" plan that provided for a lower payment during "lean" months and a higher payment during spring and summer, which are traditionally better for real estate agents.  At this point, my clients were wary about agreeing to this because of their concern that they could be digging a deeper hole for themselves.

We also discussed taking the case to the judge, but I really have no basis to argue that my clients’ income will not match that of 2005.  I suspect that in this case, my clients are spending money for products and services that they are not completely documenting.  I do not suspect any wrongdoing, but I do think that $20 here and $25 there are adding up, leaving them with no money at the end of the month.

We decided to leave the plan at the $2,000 per month figure for now.  In six months, if the income situation has not improved, we will amend the plan and go for a reduction based on real life numbers.  I have no doubt that this strategy will result in a great deal of hardship for my clients, but I don’t have any other ideas.

My conclusion – Chapter 13 has become even more unfriendly to self-employed and commision sales debtors.

[tags] Chapter 13, bankruptcy and commissioned sales debtor, real estate agents and bankruptcy, discharge tax in Chapter 13 bankruptcy, means test  [/tags]

About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.

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