An individual recently contacted our office about a possible Chapter 7 bankruptcy. The individual had significant income and virtually no credit card debt, but also significant debts from a failed business (the business was a corporation but this person had personally guaranteed a number of the debts).  The first question a bankruptcy attorney might ask themselves is whether this person qualifies for Chapter 7 under the means test.  The means test was implemented as part of the 2005 amendments to the Bankruptcy Code, in order to prevent consumers with the ability to pay back their debts from filing for Chapter 7 bankruptcy. (For more on the means test, click here). However, if the individual's debt is primarily non-consumer, such as business debts, the means test will not apply; 11 U.S.C. Sec. 707(b) states that the means test applies to "an individual debtor ... whose debts are primarily consumer debts...."

While this may sound simple, there is considerable room for argument over the application of this rule.  For example, creditors or the trustee may question what is actually non-consumer debt.  The bankruptcy code defines consumer debt as debt incurred for personal, family, or household purposes. 11 U.S.C. Sec. 101(8).  Business debts are not consumers debts.  Most courts say taxes, even personal income taxes, are not consumer debts.  "Primarily" has generally been interpreted by bankruptcy courts to mean more than half or more than 50% of the total debt. The question of how debts are classified as consumer, as opposed to non-consumer, is very fact sensitive and will require the advice of a bankruptcy attorney.  

Bankruptcy courts are currently split on the issue of whether a case with primarily non-consumer debts can still be dismissed for abuse.  In short, debtors with non-consumer debts who claim that they are exempt from the means test should anticipate a challenge to their case.  Such debtors must be prepared to prove that their debts are more than 50% non-consumer debts.

-Drew Broaddus