In a Chapter 7 filing involving primarily business debts would a subchapter S corp losses offset other income sources?

Asked over 1 year ago - Belmont, CA

I have income from one source, but losses from my full-time subchapter S corp.
For income purposes, would one offset the other to arrive at the Total Current Monthly Income for 707 b 7?
I realize that since most of my debts are business related (not from my subchapter S corp, from another source), the means test does not apply. My understanding, however, is that disposable income still needs to be below a certain level or the trustee can move it to another Chapter

Attorney answers (3)

  1. Michael J. Ireland

    Contributor Level 12

    1

    Best Answer
    chosen by asker

    Answered . Unfortunately, the information provided is insufficient to answer the question with certainty and, it would take a LOT of information to do that. Basically, the S Corp financials, ownership structure, pass through election info, reasons for loss, cash/book/tax loss reconciliations, etc. are all important to determine what income or loss you received from the S Corp. I will just assume (which is a BIG assumption) that you truly have negative income from the S Corp WHEN CALCULATED IN A WAY ACCEPTABLE TO THE BANKRUPTCY COURT.

    So, to give you SOME guidance, 707(b)(7) compares "current monthly income" (CMI) to the applicable median family income. CMI is NOT an exact science, despite its apparent complexity.

    Form 22 calculates CMI based on last 6 complete calendar months, but normally does NOT allow any "negative income" from a business to offset other sources of income. (Most software packages will allow you to input negative numbers, but then will ZERO those fields when calculating CMI). Trying to "hide" those losses in other parts of form 22 is not acceptable.

    Aside from Form 22, the trustee can move to convert or dismiss, regardless of the 707(b)(7) calculation, just based on FAIRNESS and GOOD FAITH. Since the bankruptcy courts are courts of equity, both trustees and judges try to do the right thing by balancing debtor and creditor rights and responsibilities. Therefore, most trustees and judges will try to look at your situation with some sense of REASON, not simply a mechanical calculation, when assessing the fairness of your situation.

    Since different districts and judges employ various interpretations of what is included in the definition of CMI, your results may vary quite a lot. Your income situation is not straightforward, so it HIGHLY RECOMMENDED you consult with a competent local bankruptcy attorney who knows the views of your local bankruptcy trustee and judges. A good bankruptcy attorney may also be able to advocate for an interpretation of CMI that is advantageous to your situation.

    Good luck.

    If you need further clarity, please email me at MICHAEL@MIRELAND.US Answers to questions are for general... more
  2. Javed Inam Ellahie

    Contributor Level 10

    Answered . All income coming to you has to be considered so naturally income from the sub S is taken into account. Your situation i.e. losses flowing through from the Sub S will require analysis as to what the losses are attributable to. Are these really cash flow type losses or losses resulting from depreciation type expenses. You may need to justify continue your funding of a loosing business and if you can do so (loss is temporary), you should be able the losses as a business expense.To the extent you have losses in the Sub-chapter S corporation.
    This may also be the time to consider whether it is helpful to continue with the sub S or close it out, so the business income and expenses are merged. This of course will require thorough business and bankruptcy lawyer review.

    Legal disclaimer: Disclaimer: This answer does not constitute legal advice. I am admitted in California and... more
  3. Richard Edmund Hawkins

    Pro

    Contributor Level 16

    1

    Lawyer agrees

    Answered . There is a good faith requirement that applies, even when the means test doesn't. However, large monthly disposable incomes have been tolerated in many cases; I've seen reports from other attorneys of as much as $2,000 per month.

    On the other hand, how does the S corp keep losing money--by your continually loaning to it?

    Be sure not to forget your mortgage and student loan debt as consumer debt when figuring out whether or not you have majority consumer debt!

    Finally, the trustee can't do anything; he can just file a motion to dismiss. If you lost, you would still generally have the option of converting to Chapter 11 or 13.

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