If your debts are not “primarily consumer debts” then you may be able to qualify for Chapter 7 bankruptcy much more easily.
Last week we had a blog post about an adjustment in the “means test” that is used for qualifying for Chapter 7 “straight bankruptcy. We mentioned that you’re exempt from needing to take and pass the “means test” under two circumstances:
if your debts are primarily business debts instead of consumer debts
if you fall into one of several military service categories
We’ll cover the first of these exemptions today, and the second one in our next blog post.
The Purpose of the Means Test
The “means test” is intended to not allow you to go through a Chapter 7 case if you have the “means” to pay a meaningful amount of money back to your creditors. If your income is more than the “median income” for your family size in your state, you are required to go through a complicated formula to see if you do have sufficient “means.” If you are considered to have the “means,” you are required to file a Chapter 13 case instead, paying all you can afford to your creditors for 3 to 5 years.
The “means test” was instituted as a major ingredient of the last major amendment of the federal Bankruptcy Code in 2005. That amendment was in large part motivated by Congress’ impression that consumers could discharge (legally write-off) their debts through Chapter 7 too easily. Some debtors were considered to be abusing the bankruptcy system, abuses that Congress believed needed to be reined in. In fact the amendment was called in part the Bankruptcy Abuse Prevention… Act.
Under the Bankruptcy Code prior to this Act the bankruptcy court was given a fair amount of discretion in allowing a debtor to pick between the available Chapters—the forms of relief. The law instructed the court that “[t]here shall be a presumption in favor of granting the relief requested by the debtor.” The 2005 amendment deleted this sentence and, among many other ways of toughening the law, added the “means test.”
The Purpose of the Business Debt Exemption from the Means Test
Most of the changes in the 2005 amendment were intended to affect individual consumers, not businesses and business owners. The “means test” in particular was not intended for present and former business owners. Apparently Congress did not want to discourage risk-taking among entrepreneurs, and left the door open wide for Chapter 7s by them.
The mechanism that Congress used to divide between consumers who had to take and pass the “means test” and business owners who did not is a 3-word phrase: “primarily consumer debts.” All those with “primarily consumer debts” have to take the “means test” to qualify for Chapter 7 relief. Those without “primarily consumer debts” do not have to take the “means test.”
Not “Primarily Consumer Debts”
If the total amount of all your consumer debts is less than the total amount of all your non-consumer (business) debts, your debts are not “primarily consumer debts.” If so, you can avoid the “means test.”
Section 101(8) of the Bankruptcy Code defines a “consumer debt” at as one “incurred by an individual primarily for a personal, family, or household purpose.”
But as you add up your consumer and non-consumer debts, realize that you may have more business debt than you think for two sets of reasons.
First, for purposes of this distinction in the law, debts that you might normally consider consumer debts may actually not be. For example, debts used to finance your business, even if otherwise straightforward consumer credit—credit cards, home equity lines of credit, and such—may qualify as non-consumer debt based on your business purpose of that credit.
Second, keep in mind that some of your business debts may be larger than you think. For example, If you surrendered a leased business premises or business equipment you would likely be liable not just for the missed lease payments owed at filing of the bankruptcy but also potentially for the string of future contractual payments, depreciation, and such.
These are all the more reason to confer with an attorney before assuming that you have “primarily consumer debt” and are stuck with needing to take and pass the means test. This makes sense given what is at stake if you don’t pass the means test–being required to pay on your debts for the next 3 to 5 years under Chapter 13 instead of discharging them in just a few months under Chapter 7.