- General Contractors and Bankruptcy
- May 30, 2012
- Law Firm: Law Offices of Rami N. Nabi - Tustin Office
General Contractors and Bankruptcy
Because of the recent downfall of new homes being built and the general state of the economy, many general contractors (GC’s), have found themselves unable to pay their expenses such as credit cards and business debts that have been backed by personal guarantee’s. Chapter 7 bankruptcy may offer some help for you if you are a General Contractor. Chapter 7 can eliminate the credit card debts, business loans and personal guarantees.
Some GC’s may find themselves unable to qualify for bankruptcy because their income is too high to qualify under the bankruptcy parameters. There is still options however that an experienced bankruptcy attorney can implement.
The first step is to see whether a General Contractor qualifies for bankruptcy, is to determine whether your income is higher than the median income for a family of similar size in your state. The court looks at the last six month average of your income after business expenses. If you are over the median amount you will have to pass the means test. The means test is a test that deducts from your gross income your taxes, insurance, secured debt payments such as mortgages and car payments. After the deductions the bankruptcy court determines whether you qualify or not. Before filing our petitions we make sure in determining whether you qualify and whether you should file bankruptcy in the fist place. However, what many people and unqualified attorney's do not know is if the majority of your debts are business debts then you do not have to qualify under the means test. The reason being is that if over 50% of your income is business debts then you can skip the whole test because the majority of your debt is not consumer debt. What you have to prove to the court is that you actually need to file for bankruptcy and you do not have a significant amount of disposable income at the end of the month. ( rather then filing and actually having money to pay creditors)
Another consideration when filing for bankruptcy for a General Contractor is whether the bankruptcy court will liquidate your assets or possibly shut down the business. If your business has many assets, the bankruptcy court may liquidate those assets. For example, let’s say that as a GC you have several pieces of large equipment such as tractor, cement mixer and so on. The bankruptcy trustee can sell those assets to pay creditors. However, most of the time you can exempt those assets. Meaning they are protected and will not be sold. And the assets that are not protected can possibly re purchase form the trustee
There are several considerations a general contractor and his attorney must analyze before proceeding with the filing. Here are a short list of the most important:
1. Income levels
2. What type of debts are being eliminated
3. Can they be eliminated
4. Are there alternatives to bankruptcy
5. How many assets does the company have