Documenting Small Business Income for Bankruptcy
You'll have to provide a profit and loss statement and other documents if you file for Chapter 13 bankruptcy for your small business.
Chapter 13 is often an effective solution for a small business owner who is struggling with debt but wants to keep a profitable business running. In order to meet the filing requirements and prepare an acceptable Chapter 13 plan, you must document your business income in a way that will be useful in your Chapter 13 case. Bank statements and tax returns are helpful, but they are only the beginning.
(To learn more about bankruptcy and business debts, visit our Small Business Bankruptcy topic area.)
Chapter 13 for Small Business Owners
Only individuals can file for Chapter 13 bankruptcy, not corporations or limited liability companies. However, if your business is a sole proprietorship you can file for Chapter 13 bankruptcy because it is not considered to be a separate legal entity from yourself. For this reason, many small business owners who operate as a sole proprietorship can file for Chapter 13 bankruptcy and discharge business debts. (Some types of partnerships are not considered to be separate legal entities, so the same would hold for those as well.) (To learn more, see Chapter 13 Bankruptcy for Small Businesses.)
In a Chapter 13 bankruptcy, you repay all or part of your debt through a court approved repayment plan which generally lasts three or five years. During this time you can keep what you own, including your business, but you must contribute all your disposable income to the plan. To be approved by the court, your plan must also pay creditors at least as much as they would have received if your non-exempt assets were liquidated under a Chapter 7.
(To learn more about the requirements of Chapter 13 plan, see our Chapter 13 Repayment Plan topic area.)
Why Is Documenting Your Business Income and Expenses Important?
To file for Chapter 13 bankruptcy, you must provide the court with detailed information about your income and expenses. This information helps determine how long your plan will last, how much you must repay to unsecured creditors, and the amount of your monthly payment. You must also maintain business records throughout your Chapter 13 case (which is usually between three and five years).
If you operate a business, in addition to your personal income and expenses, you must provide information about:
- your business income and expenses
- your business debts, and
- your business assets, along with realistic values for the assets.
When you file your proposed repayment plan, the Chapter 13 trustee will request your business records to make sure your plan meets the legal requirements and is feasible. If you don’t have accurate records to back up your figures, it is not likely that your plan will be confirmed (approved) by the court.
Providing Business Records to the Trustee
You will have to provide certain business records to your Chapter 13 trustee. You probably will not have to provide everything, but at a minimum the trustee will likely request tax returns and a profit and loss statement. The trustee may want to see other business records to further explain or support items contained in those documents. These might include: bank statements, cancelled checks, payroll records, receipts, ledgers (on paper or computer), invoices, asset lists, inventories, leases, contracts, and insurance documents.
Profit and Loss Statements
The most common way to document your business income and expenses for your bankruptcy case is by way of a profit and loss statement.
What Is a Profit and Loss Statement?
Essentially, in a profit and loss statement you list all of your business income for each month and then itemize and deduct all of the corresponding business expenses for that month.
Profit and Loss Statements in Bankruptcy
You will need to prepare a profit and loss statement for the six months preceding your bankruptcy filing. The statement need not be professionally prepared but it should be accurate and broken down by month.
Cash basis. Prepare the statement on a cash basis, meaning only count money that you actually collected and expenses that you paid. Do not include deductions that are not actually paid, such as depreciation expense.
No personal expenses. Do not include your personal expenses on the profit and loss statement. However, if you pay yourself a salary from the business, you can deduct the salary as an expense. It will be added back in later when you list your personal income and expenses in the bankruptcy filing.
Documents you may have to provide. You should be prepared to provide documentation in the form of:
- bank statements
- receipt books
- cancelled checks, or
- other bank records and receipts to back up your figures.