Can a bankruptcy judge force you to run a business?

Could a bankruptcy judge force a debtor to keep operating a particular business?

In the usual course of practicing bankruptcy law, such a ridiculous question wouldn’t even come up. Bankruptcy judges see more failed businesses and their downcast owners then anyone else. And there is no way that they are going to make a business owner pursue a dead-end operation, unless the owners themselves are proposing to keep the place running.

But if you read enough bankruptcy cases, you will eventually find the oddest results hidden among them.

For example in the Rahim case in Michigan, a judge did something close to forcing the husband and wife debtors to keep working at their business:

He denied them a Chapter 7 discharge. And told them that they could afford to make payments under a Chapter 11 plan. Although Chapter 11 is usually reserved for when the titans of industry go bankrupt (think General Motors, or K-Mart), it is available to individuals as well.

Naturally, as you might suspect, there are some extreme facts involved here. These debtors were both doctors, and operate a medical practice together. Their monthly mortgage payment is over $15,000, then tack on another $2,000 for the mortgage on a second home in Florida, $4,500 (a month, remember) for school tuition for their kids, and so on. Their annual income is over $500,000 per year. And the their debts, while classified as business debts, didn’t come primarily from the medical practice, they came from failed real estate investments in Florida.

In this circumstance, Judge Steven Rhodes denied issuing a Chapter 7 discharge because he said a Chapter 11 plan was feasible — and would have the effect of providing more than $200,000 in payments to creditors.

By saying this, the judge effectively hinted that the case should be converted or refiled as a Chapter 11 — which means that the debtors will be packing lunch bags and heading off to their doctor jobs, if they have any intention of getting a bankruptcy discharge.

 

By Doug Beaton

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