The bankruptcy means test is a financial test to ensure that the debtor is not “abusing” the bankruptcy system. Instead of allowing the debtor to choose whether to file a Chapter 7 liquidation bankruptcy or a Chapter 13 repayment bankruptcy, Congress created the means test to disqualify certain people from Chapter 7.
In a nutshell, if the debtor has income sufficient to repay a substantial portion of his or her debts over three to five years, the debtor “fails” the means test and is ineligible to file a Chapter 7 bankruptcy. However, Congress has created a business exception to the means test. If the individual debts are “primarily” business debts, the debtor can avoid taking the means test, and can avoid being presumptively disqualified from filing a Chapter 7 bankruptcy.
Most courts have stated that “primarily” means that more than half of the individual debts are business debts. But what is a consumer debt and what is a business debt?
A consumer debt is defined in the Bankruptcy Code as “debt incurred by an individual primarily for a personal, family, or household purpose.” Other the other hand, a business debt has been recognized by the bankruptcy courts as having a “profit motive.” The question boils down to whether the debt created during the process of trying to make a profit.
A person’s home mortgage is typically a consumer debt. Investment rental property is a business debt. A personal credit card is a consumer debt. A credit card used exclusively for business purposes is a business debt.
Perhaps not surprisingly bankruptcy courts do not always agree on classifying a debt as a consumer or business debt. For example, the Second Circuit has held that student loans are not consumer debts. Some courts have found that the tax liability on a personal income tax debt is not a consumer debt.
Bypassing the bankruptcy means test does not automatically qualify you to file a Chapter 7 case. The Bankruptcy Code also imposes a good faith requirement on Chapter 7 debtors. If you can reasonably adjust your budget to pay your creditors, the bankruptcy court will disqualify you from Chapter 7.
If you have significant business related debts and need personal bankruptcy relief, speak with an experienced Haines & Krieger Las Vegas bankruptcy attorney by calling 702-880-5554 and discuss whether you can avoid the bankruptcy means test. Your attorney can examine your finances, explain the benefits of Chapter 7 and Chapter 13, and advise you on the best course of action.