The Blue opinion adds to a growing number of bankruptcy court opinions discussing various aspects of what it takes to qualify for designation as a debtor under Subchapter V of Title 11 of the Bankruptcy Code.  In Blue, the Debtor’s qualification was challenged on a number of grounds by the bankruptcy administrator and the Subchapter V trustee. 

Before bankruptcy the Debtor closed down a business she owned.  The business was left with no assets.  By the time she filed her petition, she had a full-time job for which she received a W-2.  She also worked as an independent contractor pursuant to two verbal contracts under which she charged $50 per hour.  She filed Forms 1099 for both of the independent contracts.

11 U.S.C. § 1182(1)(A) defines what it takes to be a “debtor” under Subchapter V.  It means “a person engaged in commercial or business activities … that has … debts as of the date of the filing of the petition … not less than 50 percent of which arose from the commercial or business activities of the debtor[.]” 

The Bankruptcy Administrator and the Subchapter V Trustee argued that the Debtor was not “engaged in business” and that more than 50% of her debt was from activities other than operating a business.  They also argued that there had to be a nexus between current business and the qualifying debt under 11 U.S.C. § 1182(1)(A).

The court found that the income from the independent contracts meant the Debtor was “engaged in business.”

The court also found that, including debt incurred in connection with the renting out of the Debtor’s residence, not less than 50% of the Debtor’s debt was from her commercial or business activities.  A “nexus” between the Debtor’s current business activities and the qualifying debt was not required.

The case law on qualifications for election of Subchapter V of Chapter 11 continues to develop.  The Blue opinion offers some guidance for individual debtors seek to qualify when their original business is no longer operating.