I Failed The Means Test – Can I Still File For Bankruptcy? What If My Debts Are Primarily Business-Related?
It’s a funny thing. From my experience, bankruptcy attorneys tend to have very [ehem] unique interests. Yes, by unique I mean boring. I have had a few too many punch lines be met with blank stares to believe any different. It’s ok, I have accepted it. As Popeye would say:
Today I want to talk about a topic that I am really excited about involving an exception to the Means Test for those with primarily non-consumer debt. Unfortunately, my excitement on this topic probably means that you just got yourself a one-way ticket to snoozeville.
Those familiar with the process of filing for chapter 7 bankruptcy are likely familiar with the income limitation outlined by the chapter 7 Means test. Normally when you file for Chapter 7 Bankruptcy you have to pass what is called the Means Test, which compares your income and expenses to see whether you can afford to repay a portion of your debts. When you do not pass the Means Test, typically due to excessive income, the U.S. Trustee under section 707(b) may move to dismiss or convert your case for abuse of Chapter 7.
The loop hole that has me so excited is as follows. If your debt is primarily business debt or other non-consumer debt you are not subject to the Means Test. Yes, it’s as simple as it sounds. If more than half your debt is classified as non-consumer, there is no limit to the amount of income you can earn when filing for chapter 7 bankruptcy protection.
You may be wondering why someone with mainly business or other non-consumer debt would be excused from the Means Test? It’s simple: Congress wanted to encourage entrepreneurship by eliminating the fear of business failure. Therefore, it removes some risk associated with business ventures.
What is the Difference Between Consumer and Non-Consumer Debt?
A consumer debt is a debt incurred by an individual primarily for a personal, family or household purpose. Some common examples of consumer debt include credit card debt, personal loans, payday loans, residential real estate loans, personal car loans, and more. Alternatively, non-consumer debt comprises of taxes, business credit card debt, business debts, debt incurred for motive for profit, investment real estate debt, business car loans, and more.
Did you catch that last line? Specifically, the word “taxes”? I hope so, because that is a big deal. If a majority of your debt results from income taxes, you will not have to pass the Means Test in order to qualify for Chapter 7 Bankruptcy.
But income taxes have nothing to do with a business, so why are they classified this way? Good question. Personal income taxes are not incurred voluntarily, are assessed for the public wealth, and arise from the earning of money- three pretty good reasons why they should be classified as non-consumer debts. Personal injury and tort debts are also non-consumer debts due to the fact that they are involuntarily incurred for a purpose other than for family, household, and personal purposes. Consumer debts on the other hand are incurred voluntarily for a personal and household purpose, and result from consumption.
If you are concerned about qualifying for chapter 7 bankruptcy under the Means Test, or are wondering whether your debt can be classified as non-consumer, you should probably set up a consultation with me. Remember, I am an experienced bankruptcy attorney and I have offices in Phoenix, Tucson and Casa Grande. The icing on the cake? All initial bankruptcy consultations are free of charge. It can’t get much easier than that.