29 Jul Bankruptcy and the MLM Distributor – Part III Income Supression Issues
Over the past few days, I have written two posts about special problems that arise when an MLM distributor seeks to file bankruptcy. In the last post I spoke about the presumption of abuse problem that could arise if an MLM distributor filed a Chapter 7 immediately after losing his commission stream due to a change in commission schedules or the termination of a program.
This post will discuss a somewhat related problem called “income suppression” that can be the basis of a trustee objection.
Income suppression refers to a situation in which a debtor intentionally minimizes his cash flow for the purpose of qualifying for bankruptcy, despite his capacity and ability to earn a higher monthly income. Bankruptcy Code Section 727(a)(5) denies a discharge to any debtor who “has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities.”
As a practical matter a trustee can argue that the MLM distributor has the contacts, experience and knowledge to rebuild his organization but has chosen not to because he wants to qualify for Chapter 7 and discharge thousands of dollars of credit card debts.
Should the trustee begin an income suppression investigation, he will look at the distributor’s income history, investigate the size of his organization, and the debtor’s previous experience building and rebuilding his network. My experience has also been that when the trustee launches an income suppression investigation he will rarely just withdraw it, regardless of the facts. Although it would seem to be a conflict of interest, if a trustee sees potential assets, he will reclassify the Chapter 7 from “no asset” to “asset” then he will obtain Court authorization to hire a law firm (usually his own law firm) to pursue those assets. Since the hiring a law firm creates a billable hour environment, you can expect that the trustee will do everything in his power to pursue a settlement (i.e., payment from you).
In addition, income suppression cases are matters that allow Chapter 7 trustees to develop a reputation for aggressiveness within their legal community. Bottom line: defending an income suppression complaint is expensive, time consuming and stressful. You are much better avoiding this type of litigation.
How do you avoid income suppression complaints? If you see MLM as your business future, bankruptcy may be something you want to avoid. MLM distributors are optimistic by nature and a good MLM distributor can regenerate a strong organization and return to profitability in a matter of months. Trustees know this, meaning that an MLM business model may be inconsistent with the whole idea of bankruptcy.
If you are prepared to discontinue your MLM dreams, take a job (or at least document that you have submitted resumes and job applications), you have a better chance at avoiding an income suppression problem.
The United States Trustee (and by extension the Chapter 7 Trustee’s office) is part of the United States Department of Justice. They prosecute bankruptcy crimes. While the risk of such a prosecution is low, you do not want to find yourself in a situation in which you filed Chapter 7, obtained a discharge, and shortly thereafter reconstituted a profitable downline.
In Part IV of this series, I will discuss the issues arising with Chapter 13 and the MLM distributor.
Jonathan Ginsberg, Esq.
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