Five Year Plan a Must For Small Business in 9th Circuit

The 9th Circuit Bankruptcy Appellate Panel recently held that a Chapter 13 debtor engaged in business can not deduct necessary business expenses from gross receipts in determining current monthly income.  In re Wiegand, decided April 3, 2008, all but guarantees that small business chapter 13 debtors will be required to spend five years in a Chapter 13 plan.

Despite the terms of the official form B22C created by the courts for use in evaluating Chapter 13 debtors, the clear language of §1325(b)(2)(B) does not permit the subtraction of ordinary and necessary business expenses from the gross receipts of a small business debtor when calculating Current Monthly Income pursuant to §101(10A).  This problem can be remedied with a bit of pre-planning.  A small business debtor may want to incorporate any business operations at least six months prior to a Chapter 13 filing.  This should allow netting of expenses against income to avoid an unnecessary and probably unintended two year extension of an otherwise three year plan.

While the Bankruptcy Appellate Panel’s opinion does not seem to make a great deal of sense, it is the result of a careful analysis of the statutory language drafted by congress.  The opinion correctly reminds us that the actual language of a statute must trump the language or instructions of any form devised by the courts for its implementation.  No court rule or form can permit waiver of a statutory mandate unless it is specifically authorized in the statute.

This decision is another anomalous result of the poorly thought out and inconsistently drafted re-write of the bankruptcy code in 2005.  That legislation is a clear example of what can happen when large amounts of money are spent by lobbyists on behalf of business interests who do not understand a complicated set of statutes like the bankruptcy code.  It is hard to see any benefit from this statutory manipulation.  The legislation seems to have succeeded only in creating an additional burden for the already besieged American consumer.  It is small wonder the economy is slowing and the American middle class is shrinking.