Practical Bankruptcy: The Easiest Way to Qualify for Chapter 7 Is to Avoid the Consumer “Means Test” Altogether

Skip the “means test” if your debts are not primarily consumer debts.

 

The Means Test is Not for Business Bankruptcies

Congress added the means test in 2005 because it perceived that some consumers were taking advantage of the bankruptcy system. Apparently they did not think that businesses were. So the means test only applies to “individual” debtors—to human beings, not to corporations or other kinds of business entities filing bankruptcy.

And it only applies to those debtors “whose debts are primarily consumer debts.” (See Section 707(b)(1) of the Bankruptcy Code.)

So if you operated or continue to operate a business and a lot of your debts come from that business, you may not need to take the means test to qualify for Chapter 7 “straight bankruptcy” relief.

How Do You Know If You Have “Primarily Consumer Debts”?

Simply said, if more than half of your debts are consumer debts, instead of business ones, then you have “primarily consumer debts.”

Note that all debts count, including secured ones, on both the consumer and business side of the scale. For example, more than half of your unsecured debts could be business debts, but if after including your home mortgage and/or personal vehicle loans your total consumer debts exceed your business ones, you don’t get to skip the means test. But in the same way a loan on a vehicle used primarily for business could tip the scale on the business side so that you don’t have “primarily consumer debts.”

But what’s a “consumer debt”? The Bankruptcy Code defines this with language that may sound familiar: it is “debt incurred primarily for a personal, family, or household purpose.”

You May Have More Business Debt than You Think

If you operated a business but figure your debt from it is not as large as your consumer debt, be sure to consider the following:

  • Some of what you may immediately assume is consumer debt—such as credit card purchases and cash advances—may in fact qualify as business debts if incurred for a business purpose. If you have a credit card that you initially got and used for consumer purposes, but then used to purchase business supplies or inventory, the debt on those purchases could be counted as part of your business debt.
  • Some business debts may be much larger than you think. For example, if you had to surrender leased business equipment or your business premises, in some situations you may be legally liable for most or all of the money that you would have paid over the life of the lease.  
  • If your business was a corporation or some other business entity which had its own debts, you may well be individually liable for much or even all of that business’ debts if, for example, the corporation did not strictly maintain its corporate identity and/or the corporation and you did not keep your finances strictly separate.
  • Businesses in financial trouble generate more than their share of litigation, including nasty ones by former partners, investors, other insiders, suppliers, customers, competitors, etc. The amounts allegedly owed under such litigation can be large, adding to the business debt side of the ledger.

As to each of the examples above, there can be legitimate debate about what is consumer vs. business debt. Different bankruptcy courts may even decide differently. In fact some of these kinds of distinctions may not have been resolved yet in your local court. Your attorney will advise you about this. It is certainly worth looking closely at whether you could avoid the means test by not having “primarily consumer debts.”

 

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