§ 91.6     Debtor Engaged in Business
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 91.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

When the Chapter 13 debtor is engaged in business,1 in addition to expenses for the maintenance or support of the debtor and of dependents, “expenditures necessary for the continuation, preservation and operation” of the debtor’s business are deducted to arrive at disposable income.2 There is a curious lack of parallelism between the business and nonbusiness expenses that are deductible to determine projected disposable income. To be deductible under § 1325(b)(2)(A), an expense has to be “reasonably necessary . . . for the maintenance or support of the debtor or a dependent of the debtor.”3 To be deductible under § 1325(b)(2)(B), a business expense need only be “necessary for the continuation, preservation and operation of such business.”4 It is doubtful that Congress intended to allow “unreasonable” business expenses to be deducted in calculating projected disposable income for a debtor engaged in business. However, the lack of parallelism in language could be interpreted to permit Chapter 13 debtors engaged in business somewhat more discretion in the budget for business expenses than is allowed personal expenses for maintenance or support.

[2]

It is also at least interesting that Congress described the deductible expense of a business debtor conjunctively as those necessary for the “continuation, preservation and operation of such business.”5 Congress is presumed to mean something by every word in a statute. The courts will eventually determine the meaning, if not the differences, among the three concepts—continuation, preservation and operation. Operation is probably the easiest of the three words—it conveys that the debtor has a business and the expenses of running the business will be deductible to determine projected disposable income. Preservation suggests something altogether different—even the possibility of entombing a business that isn’t operating. Continuation could be redundant of operation unless the business is not operating, in which case continuation, akin to preservation, describes something about a business that isn’t operating. The collection of undefined terms in § 1325(b)(2)(B) is an invitation to clever arguments by resourceful (desperate?) debtors.

[3]

To arrive at projected disposable income, a debtor engaged in business must work up a pro forma statement of income and expenses for the business. The standing trustee or U.S. trustee typically requires a pro forma operating budget before taking up the plan at confirmation.6 The budget for the business is usually best presented separately from the debtor’s personal living expenses. The net business income available after payment of all necessary business expenses is then the starting amount from which personal expenses are deducted to arrive at projected disposable income.7

[4]

The adjustment in projected income for necessary business expenses has produced few reported cases. In In re Schnabel,8 the debtor claimed to be a real estate developer entitled to deduct expenses for an office, transportation, travel and entertainment to arrive at projected disposable income. The trustee and an unsecured creditor objected, arguing that the debtor was not engaged in business and did not have business expenses.

[5]

The court first consulted § 1304, which defines “debtor engaged in business” as a “debtor that is self-employed and incurs trade credit in the production of income from such employment.”9 The debtor testified that he was retired and in the early stages of developing a real estate business. The business had never produced any income, and the proposed plan did not depend upon business income for funding. The court concluded that deductions for business expenses were not permitted by § 1325(b)(2)(B) because the debtor was not engaged in business. The court explained, “[T]he Debtor’s venture is a hobby more than a business.”10

[6]

Another bankruptcy court uncovered a potential problem with application of the disposable income test in business Chapter 13 cases. In In re Grear,11 the debtor was legitimately engaged in business. The plan separately classified trade debt incurred in the month before bankruptcy to be paid in full in the ordinary course of business, directly by the debtor. There were unfair-discrimination objections to this classification of the prepetition trade creditors.12 The court found that the plan probably failed the disposable income test:

[T]he debtor proposed to pay [trade creditors with claims incurred in the month preceding bankruptcy] “outside the plan in the ordinary course of the debtor’s business.” Since, under the disposable income requirement of § 1325(b)(1)(B), all the debtor’s disposable income must be applied to make payments under the plan, the debtor may not pay these creditors’ claims during the period of this plan without violating the disposable income requirement of § 1325(b)(1)(B).13
[7]

Grear does not directly consider whether payment of last month’s trade creditors during the first month after the filing of the Chapter 13 case would be “necessary for the continuation, preservation, and operation of [the debtor’s] business.”14 Prepetition trade credit typically is ordinary unsecured debt. The debtor’s proposal in Grear was a classification of claims that had to be measured against the unfair-discrimination standard in § 1322(b)(1). On the right proof, special treatment for prepetition trade creditors should be permissible under both the unfair-discrimination standard for classification in § 1322(b)(1) and the disposable income test in § 1325(b)(2)(B). It is easy to imagine a Chapter 13 case in which employees or suppliers of raw materials need special treatment to ensure that the debtor stays in business. Section 1325(b)(2)(B) contemplates that expenditures “necessary for the continuation, preservation, and operation of [the debtor’s] business” will be deductible to calculate projected disposable income. There should be no conflict between § 1322(b)(1) and § 1325(b)(2) on this issue.

[8]

One bankruptcy court has recognized that the financial needs of a debtor engaged in business may justify special expense items. The debtor in In re Marshall15 was a masonry contractor. The plan provided for two cars and an old pickup truck. Over objection, the bankruptcy court found that two cars and an old pickup truck were reasonable and necessary for this debtor:

All families have basic transportation needs. Where children are involved, when both spouses work and when one spouse is self employed in a business which requires him to “be in more than one place at a time,” few families would be able to function with one car and a work oriented pickup truck. Mrs. Marshall needs an automobile to get to work. Mr. Marshall needs an automobile for the less physical aspects of his business and he needs a work vehicle for his workman and himself to travel to job to job and to haul tools, supplies and materials.16

 

1  See §§ 31.1 [ Special Information Needs ] § 33.1  Special Information Needs In Business Cases, 57.1 [ Operating a Chapter 13 Debtor Engaged in Business ] § 52.1  Operating a Chapter 13 Debtor Engaged in Business and 57.2 [ Additional Filing and Reporting Requirements ] § 52.2  Additional Filing and Reporting Requirements.

 

2  11 U.S.C. § 1325(b)(2)(B).

 

3  11 U.S.C. § 1325(b)(2)(A) (emphasis added). See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support.

 

4  11 U.S.C. § 1325(b)(2)(B) (emphasis added).

 

5  11 U.S.C. § 1325(b)(2)(B) (emphasis added).

 

6  See §§ 57.1 [ Operating a Chapter 13 Debtor Engaged in Business ] § 52.1  Operating a Chapter 13 Debtor Engaged in Business and 57.2 [ Additional Filing and Reporting Requirements ] § 52.2  Additional Filing and Reporting Requirements.

 

7  This assumes that all the net operating income of the business is “received by” the debtor for purposes of § 1325(b)(2). If the debtor shares that income, for example, with a partner, then only the portion payable to the debtor would be included in the calculation.

 

8  153 B.R. 809 (Bankr. N.D. Ill. 1993).

 

9  11 U.S.C. § 1304 (emphasis added).

 

10  153 B.R. at 819.

 

11  163 B.R. 524 (Bankr. S.D. Ill. 1994).

 

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

 

13  163 B.R. at 527.

 

14  11 U.S.C. § 1325(b)(2)(B).

 

15  181 B.R. 599 (Bankr. N.D. Ala. 1995).

 

16  181 B.R. at 602.