Cite as: Keith M. Lundin, Lundin On Chapter 13, § 10.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
A corporation is not an individual and is not eligible for Chapter 13.1 That the corporation is closely held, even by a single shareholder, is of no moment—even an “incorporated individual” in the form of a professional corporation or limited liability corporation is not eligible for Chapter 13.2
The bankruptcy courts have respected the boundaries between an individual debtor and that individual’s closely held corporation. The assets of a debtor’s closely held corporation are not protected from creditors of the corporation upon the filing of Chapter 13 by the individual.3 The corporation is not protected by the automatic stay of the individual’s case.4 When the debtor is not directly or indirectly liable for debts of a closely held corporation, the debts of that corporation are not included in the eligibility calculation for the individual debtor.5
Sometimes the boundaries between an individual and a closely owned corporation are difficult to draw. When the debtor is engaged in business in corporate form and the debtor owns assets used by the corporation and the debtor is individually liable on the corporation’s debt, a Chapter 13 petition by the individual may force reorganization of assets or liabilities of the corporation. In such a situation, one court recognized that the individual debtor is eligible for Chapter 13 notwithstanding that the restructuring of the individual’s debts and assets has a significant effect on the rights of creditors of the closely held corporation.6 When the individual debtor is also a professional corporation, creditors of the corporation retain their rights to proceed against the separate assets of the corporation, including its income, after the filing of an individual Chapter 13 petition.7
Complicated eligibility questions may be presented when a closely held corporation is dissolved before or during the Chapter 13 case. The individual shareholder’s responsibilities to creditors will be defined by state law and may include holding the assets of the corporation for the benefit of creditors. If the individual debtor is entangled in the assets and liabilities of a closely held corporation, prepetition dissolution of the corporation may clarify the debtor’s Chapter 13 eligibility by eliminating the argument that an ineligible entity is the petitioner. Conversely, dissolution may confuse the debtor’s eligibility by creating new relationships and duties between the debtor and the assets and liabilities of the corporation. In one reported decision, the bankruptcy court refused confirmation of a plan by an individual who was eligible for Chapter 13 because the debtor dissolved her closely held corporation after the petition, then proposed to manage the debts and assets of the (dissolved) corporation through her plan.8
1 11 U.S.C. § 109(e). See § 10.1 Debtor Must Be an Individual; Spouses Allowed.
2 In re Agrinsoni, No. 11-09111 BKT, 2012 WL 2411887 (Bankr. D. June 26, 2012) (Tester) (Notwithstanding confirmation of plan, case filed in name of individual doing business as medical corporation was dismissed. Named debtor was corporation under Puerto Rico law, ineligible for Chapter 13 relief.); Brian v. Flickinger (In re Flickinger), No. 1:10-ap-00049, 2010 WL 3431659 (Bankr. M.D. Pa. Aug. 30, 2010) (unpublished) (France) (Corporation not eligible to be Chapter 13 debtor under § 109(e).); In re McCormick, 381 B.R. 594 (Bankr. S.D.N.Y. Feb. 8, 2008) (Morris) (Limited liability company is not eligible for Chapter 13.); In re La Cashe Land Co., 54 B.R. 629 (E.D. La. Nov. 14, 1985) (Sear); Forestry Prods., Inc. v. Hope, 34 B.R. 753 (M.D. Ga. Nov. 17, 1983) (Owens). See Vocque v. IRS, 60 B.R. 84 (Bankr. W.D. La. Jan. 15, 1986) (Smallenberger) (Income to debtor’s professional corporation is not protected by Chapter 13 filing.).
3 See In re McCormick, 381 B.R. 594 (Bankr. S.D.N.Y. Feb. 8, 2008) (Morris) (Neither automatic stay nor codebtor stay extends to limited liability company wholly owned by Chapter 13 debtor.); In re Loughnane, 28 B.R. 940 (Bankr. D. Colo. Apr. 12, 1983) (Gueck).
4 In re McCormick, 381 B.R. 594 (Bankr. S.D.N.Y. Feb. 8, 2008) (Morris) (Since only individuals are eligible for Chapter 13, debtor could not extend benefit of automatic stay to wholly owned limited liability company by analogy to codebtor stay in § 1301.).
6 Associates Commercial Corp. v. Stevenson, 28 B.R. 37 (Bankr. S.D. Miss. Sept. 2, 1982) (Eaton), aff’d, 28 B.R. 39 (S.D. Miss. Feb. 9, 1983) (Cox). See also In re Mikulasik, 380 B.R. 499, 505 (Bankr. N.D. Ohio Jan. 10, 2008) (Baxter) (Trustee’s objection to reference in petition and schedules to corporation that debtor once owned is overruled; reference is not misleading to creditors. Former corporation is not alter ego, and reference “promotes full disclosure and judicial economy.”).
7 See Vocque v. IRS, 60 B.R. 84 (Bankr. W.D. La. Jan. 15, 1986) (Smallenberger) (Chapter 13 petition by individual debtor does not prevent IRS levy on postpetition earnings of debtor’s wholly owned professional corporation.).
8 In re Lane, 215 B.R. 810 (Bankr. E.D. Va. Dec. 4, 1997) (Shelley).