Businesses not subject to means test
After announcing an influx of loans and financial support from various sources, including a $1 billion loan from Carl Icahn, CIT Group has officially filed for bankruptcy protection. They are seeking protection under Chapter 11 bankruptcy which is designed for reorganization, not complete discharge of all debts. In order to avoid bankruptcy, CIT Group has attempted to improve its financial situation by offering a debt-exchange proposal to bondholders. That proposal was rejected by bondholders who instead wanted to proceed with a pre-packaged bankruptcy plan to reduce CIT's debt by $10 billion. Because they are filing for Chapter 11 protection, CIT Group will also be allowed to continue its operations of providing loans to small to medium size businesses.
The decision and the ability of CIT Group to file raises concerns for many, especially stock holders. The U.S. Government, a stockholder through bailout programs, stands to loose approximately $2.3 billion in the bankruptcy plan. The other question raised is how can an organization that has received approximately $4.5 billion in loan support in one week still file for bankruptcy protection. The answer is two-fold. First, they are filing pursuant to Chapter 11, which means they are seeking to reorganize, instead of discharging all of their debt. The second answer is because they can. There is not a "means test" for business bankruptcy. The means test was implemented in 2005 as part of a series of consumer bankruptcy reform.
The concern at that time was that "wealthier" individuals, or individuals with means, would file for Chapter 7 protection and receive total discharge of all their debt, even though they had an ability to pay their debt. A formula was designed based on the consumer's income and debt balances. Ironically, the tables of scrutiny are now turned. This concern highlights a significant difference between a business filing and individual consumer filing. The good news for consumers, however, is that you can still apply for protection like CIT Group even if you do not pass the means test. Relief is still available in the form of Chapter 13 bankruptcy . CIT Group is seeking reorganization under Chapter 11 because it wants to reduce debts and remain in business. The end goal is continued operations. When deciding to file for your own bankruptcy, you need to have the same type of discussion with your bankruptcy attorney.
Before filing, you will need to prepare for the means test. Because it is based on total income and total debts, preparation for bankruptcy should include a thorough review and inclusion of all the amounts that you owe and all sources of income. Include debts that you owe to relatives and the credit accounts that come attached to the junk mail catalogs. Include income from relatives and any mini side businesses that you operate. A bankruptcy attorney needs to have a complete picture of your financial situation so they can then help you tailor the best filing plan for you and your family.