Self Employed Debtors Try To Manipulate Income For Means Test

Eligibility for Chapter 7 bankruptcy depends upon family income. An employee’s income is usually clearly determined by his payroll statements during the six months prior to filing. A self-employed debtor’s compensation from his own business typically varies month to month and is not cleanly stated on wage statements. Self-employed debtors can control their salary and distributions from their own business. I have been asked several times by self-employed debtors whether they can manipulate their income to make themselves eligible for Chapter 7. These self-employed debtors suggests that they reduce salary and distributions from their business so that their prior six month’s income passes the means test. 

The problem with this plan is that when the debtor reduces his salary and profit distributions to himself the undistributed money will accumulate in the business account. The accumulation of money increases the value of the business. The Chapter 7 trustee is more likely to go after the debtor’s ownership interest in his business the more cash is sitting in business accounts. 

If the business has its own debt then the accumulation of business cash awaiting distribution would not create value for the bankruptcy estate. Yet, the business creditors with judgments could garnish cash in the business accounts. 

Some debtors suggest that they simply do not send out bills to their customers so that the business will not receive payments nor will it generate accounts receivable. Technically, billable work, goods, and services is still a business assets even if no invoice is sent, although this may not clearly show up on business books. 

A business own may be able to control his bankruptcy eligibility, but it is not an easy process. The debtor must clearly think through the consequences of this type of bankruptcy planning. Other than staying home and not working, there is no sure way for a self-employed debtor to to manipulate family income.