§ 10.5 — Partners and Corporate Owners May Be Eligible
Revised: April 25, 2016
Individuals are eligible for Chapter 13 notwithstanding close ownership or active participation in a partnership or corporation. The corporation or partnership is not eligible,1 but its individual owners and partners may qualify as individuals with regular income for purposes of 11 U.S.C. § 109(e).
Chapter 13 can offer financial stability to partners and corporate players whose partnerships or corporations have financial problems. A corporate or partnership bankruptcy typically puts financial pressure on individual partners and corporate officers, directors and shareholders. The task of debtor’s counsel may be to “shoehorn” an individual partner or corporate principal into Chapter 13. Often this involves isolating the individual’s debts and assets from those of the partnership or corporation and carefully characterizing the indirect obligations that arise from or through the other entity.2
It may be in the best interests of creditors that an individual partner, corporate officer, director or shareholder be in a Chapter 13 case when the partnership or corporation is in financial distress. By parking the individual in a Chapter 13 case, some control of the individual’s assets and income is accomplished during administration of the other entity.
For example, if the obligations of an individual arising from a partnership or corporate bankruptcy exceed present financial ability, Chapter 13 may guarantee protection of the individual’s assets from the anarchy of creditor actions and permit a sharing by creditors in the debtor’s future income. This maximizes the return to creditors in a manner not possible in a Chapter 7 case. The filing of a Chapter 13 case by an individual partner or corporate principal may preempt involuntary petitions by nervous creditors.