Are Partnership Distributions Means Test Income?

The means test considers all regular family income. In some cases, it is unclear whether money the debtor receives to pay living expenses is income for means test purposes. Consider a person who invests $200,000 in to a business partnership. The partnership initially generates positive cash flow which is distributed to the partners. After some time, the business slows down and does not produce cash flow from operations. The investor needs money to pay living expenses. Each month the partnership agrees to pay the investor approximately $5,000 as a return of his initial capital contributions. At this rate, the investor will receive $60,000 per year from the partnership. The investor asked me whether the return of capital is considered as income for his means test analysis if he has to file Chapter 7 bankruptcy.

Means tests are reviewed and administered by the U.S. Trustee office. I called an attorney for our local U.S. Trustee and posed the question. The attorney could not provide a definitive answer. The attorney said that if the partnerships distributions to the investor were in the nature of loans then the money would not be considered means test income. If the money was profit distributions then it would be income. If the money was return of capital the treatment is unclear. The best plan would be for the partnership records to show that the $5,000 monthly payments were loans. There should be a partnership resolution documenting the amount and the nature of the distributions. It would probably help this prospective debtor if distributions required the consent of other partners, and if under the partnership agreements, the distributions could be suspended by partnership vote.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida