25 Jul Bankruptcy and the MLM Distributor – Part II Presumption of Abuse
A few days ago, I wrote Part I of a series entitled Bankruptcy and the MLM Distributor. In that post I described my typical MLM distributor as an entrepreneurial, motivated businessperson who worked full time on his MLM business and ran into debt problems because of a sudden or unexpected change in his compensation plan, a switch from one MLM program to another, or credit card debt arising from business expenses like travel and marketing associated with maintaining a large organization (downline).
I also noted that one of my roles as a bankruptcy attorney is to evaluate risk – and specifically the risk of challenges by the trustee or creditors to the dischargeability of a specific debt or to a discharge in general. I observed that oftentimes, MLM business and bankruptcy do not mix well. Part II of this series will explain specifically about some of the risks associated with a bankruptcy filed by an MLM distributor and some thoughts about how to minimize those risks.
Risk 1: Presumption of Abuse. As you may know, the Bankruptcy Code provides that all consumer debtors must submit to a median income/means test to determine their eligibility for Chapter 7 and/or their unsecured creditor payment obligations in Chapter 13. The median income/means test looks at the six month period prior to the month of filing.
MLM distributor debtors may or may not be subject to the median income/means test because, arguably, their debt may be primarily business debt as opposed to consumer debt. Depending on where you live and file your case, the question of whether personal credit card debt used to finance a home based business yields “consumer debt” or “business debt” could be a threshold question.
Assuming that you and your lawyer conclude that the median income/means test is required, the MLM debtor may have a problem with the presumption of abuse arising from recent months of high income. This is especially true if the distributor’s income was suddenly reduced due to a change in the compensation schedule or a termination of a particular program.
Further, I have seen trustees argue that payments from down line distributors (i.e. members of a distributor’s organization) designated for advertising or marketing constitutes income that goes into the median income test calculation. In one such case, my client was collecting $10,000 per month from her down line and immediately sending that money to an advertising co-op with other distributors. Even though there was a clear history of this kind of transfer, and there was no money in her account at the time we filed, the trustee took the position that the $10,000 should be counted as monthly income.
Even if you and your lawyer conclude that the median income/means test is not required because the debt is “business debt,” you could still have trouble. Part III of this series will discuss the “supression of income” issue that can arise in an MLM distributor bankruptcy.
Jonathan Ginsberg, Esq.
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