§ 113.9     Special Drafting Considerations for Debtor Engaged in Business
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 113.9, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

There is no official form for the Chapter 13 plan for a debtor engaged in business.1 Some jurisdictions, by local rule or practice, prescribe a special form for the Chapter 13 plan for a debtor engaged in business.2

[2]

Typically, the plan for a business debtor differs from the ordinary Chapter 13 plan by having more room for classes of creditors and more flexibility to state the order and amounts of payments. For example, business debtors have prepetition trade creditors that may need to be offered special terms through the Chapter 13 plan.3

[3]

Postpetition trade creditors, suppliers and employees are not postpetition claim holders under § 13054 but may assert administrative expenses if not paid in the ordinary course by the debtor’s business.5 The plan should provide for full payment of all postpetition debts that qualify as expenses of administration under § 503(b).

[4]

The debtor engaged in business needs a more detailed budget than a nonbusiness debtor. Counsel will find it difficult to design a meaningful Chapter 13 plan without first budgeting the ongoing operating expenses of the business. It is best to prepare a separate budget for the business and simply have the net income from the business distributed to the plan to pay prepetition business and personal debts. It is a bad idea for the business debtor to mix debts for personal expenses in the budget for the business. The business budget should be strictly ongoing expenses of operating the debtor’s business. Personal expenses like the home mortgage or payments on a car should be separately stated in the plan.

[5]

Business debtors should reveal in the business budget precisely the salary or draw that the debtor anticipates taking from the business after confirmation. The disposable income test in § 1325(b)6 will require the debtor to commit all income from the business, after business expenses, to funding the Chapter 13 plan. In essence, the disposable income of the business becomes the projected income that, net of reasonable and necessary,7 personal expenses, must be committed to funding the plan. The disposable income test creates problems for debtors engaged in business who need to pay prepetition employees, trade creditors or suppliers to stay in business.8 Any proposal to accelerate the payment of or pay a higher percentage to prepetition employees, trade creditors or suppliers faces unfair-discrimination analysis under § 1322(b)(1)9 and may run afoul of the disposable income test in § 1325(b).10

[6]

Acquiring equity in business assets after confirmation is a tricky confirmation problem for debtors engaged in business. If the business is making debt payments that will acquire ownership of equipment, real property or inventory, then the payments should be revealed in the plan, not buried in the debtor’s budget. Creditors must exercise unusual diligence with respect to a business debtor’s plan to determine the necessity of the business expenses—in particular, that the business is not an investment vehicle.

[7]

Any postconfirmation financing for the business should be provided for in the plan. For example, if the debtor is a farmer and will be periodically selling crops that are subject to prepetition security interests, the plan must make provision for use of some portion of the crop income for the expenses of putting in the following year’s crop. Projecting a business debtor’s financing needs at the time of confirmation saves a lot of scrambling after confirmation when the debtor suddenly realizes that the business doesn’t have cash for its next business cycle. Also, the questions that must be answered to project the financing needs of the postconfirmation debtor are the same questions that have to be answered to prepare a realistic postconfirmation budget for the debtor.

[8]

Attorney fees in business Chapter 13 cases may require special treatment. Business cases tend to be more complicated and to require more attorney time than consumer Chapter 13 cases. Payment of fees through the plan may require a special provision, for example, a specified monthly payment toward accumulated fees after confirmation. In some districts, there are local rules or procedures specific to the allowance of fees in business Chapter 13 cases. For example, under the fee guidelines for the Eastern District of California, a debtor’s counsel may be entitled to a higher fee in a business Chapter 13 case.11


 

1  See §§ 36.2 [ Plan ] § 36.24  Plan, 55.1 [ Debtor Must File a Plan ] § 51.2  Debtor Must File a Plan and 57.2 [ Additional Filing and Reporting Requirements ] § 52.2  Additional Filing and Reporting Requirements.

 

2  See § 57.2 [ Additional Filing and Reporting Requirements ] § 52.2  Additional Filing and Reporting Requirements.

 

3  See § 57.1 [ Operating a Chapter 13 Debtor Engaged in Business ] § 52.1  Operating a Chapter 13 Debtor Engaged in Business.

 

4  See § 302.1 [ Postpetition Claims ] § 137.1  Postpetition Claims before BAPCPA.

 

5  See §§ 295.1 [ Utilities ] § 136.8  Utilities before BAPCPA and 298.1 [ Miscellaneous Administrative Expenses and Other Priority Claims ] § 136.14  Miscellaneous Administrative Expenses and Priority Claims before BAPCPA.

 

6  See discussion of projected disposable income test beginning at § 91.1  In General.

 

7  See §§ 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support and 167.1 [ Debtor Engaged in Business ] § 91.6  Debtor Engaged in Business.

 

8  See § 57.1 [ Operating a Chapter 13 Debtor Engaged in Business ] § 52.1  Operating a Chapter 13 Debtor Engaged in Business.

 

9  See §§ 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination, 151.1 [ Priority Claims ] § 87.4  Priority Claims and 158.3 [ Suppliers or Other Business-Related Creditors ] § 89.4  Suppliers or Other Business-Related Creditors.

 

10  See § 167.1 [ Debtor Engaged in Business ] § 91.6  Debtor Engaged in Business.

 

11  See In re Dorsett, 297 B.R. 620, 624–25 (Bankr. E.D. Cal. 2003) (Debtors’ day care operation may constitute a business, but case lacks complexity necessary to qualify counsel for the higher guideline fee. “This court’s Chapter 13 Fee Guidelines introduced the concept of a ‘business case’ in an attempt to assure fair compensation for attorneys employed in those case (business in nature), which tend to involve unique issues and generally require more legal work than the typical consumer case. . . . However, every case in which the debtor operates a small business is not necessarily a ‘business case’ as that term is used in the Chapter 13 Fee Guidelines. . . . [T]hat debtors are self-employed in a for-profit enterprise does not necessarily mean that their case has the unique issues and the level of complexity sufficient to warrant a higher level of compensation for their attorney.”).