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Making Sense of Bankruptcy: Avoiding the “Means Test” in a Business Bankruptcy

If you have debts from a closed or about-to-close business, you may be excused from the “means test” and qualify for Chapter 7.


Here’s the sentence that we’re explaining in today’s blog post:

Avoiding the “means test” can be highly advantageous, and can be done if your debts are not “primarily consumer debts,” this being more likely because some seemingly consumer debts may have been incurred for a business purpose and because some business debts may be much bigger than you think.

The “Means Test”

The “means test” is intended to make those who have the “means” to pay back a meaningful amount of their debts to do so. They are not allowed to file a Chapter 7 “straight bankruptcy” case to simply discharge all or most of their debts in a matter of a few months. Instead they must go through a 3-to-5-year Chapter 13 “adjustment of debts” in which they partially or (rarely) completely pay back their debts within that period of time.

The “means test” is based first on your income. You can pass the “means test” and file a Chapter 7 case simply by having low enough income.  

And if your income is too high you may still be able to pass the test through a rather complicated calculation of allowed expenses. Some allowed expenses are based on local, regional, or national standards, and some are based on actual expenses. After subtracting the allowed expenses, if the resulting monthly disposable income is relatively low in relation to the amount of debts (applying a rigid formula), you pass the “means test.”

The Importance of Being Excused from the “Means Test”

The benefit of not being required to take and pass the “means test” is that you can avoid all this and would likely be allowed to file a Chapter 7 case. That could potentially save you many thousands of dollars and let to start rebuilding your credit and getting a fresh start years earlier than if you had to file a Chapter 13 case.

Being excused from the “means test” may not matter if you can pass the test. If you operated a business in the last 6 months and had little or modest income, you may well easily pass the “means test” simply because your recent income was low enough. Or your “disposable income” after deducting your allowed expenses may be low enough. Either way you’d pass the “means test.” But if, for example, you closed down your business more than 6 months ago and found employment that pays moderately well, and/or have a spouse with a good income, you may not be able to pass the “means test.” Then being excused from this test could be essential.

Not “Primarily Consumer Debts”

You completely avoid the “means test” if your debts are not “primarily consumer debts.” Then the amount of your income would not rigidly disqualify you from filing a Chapter 7 case.

What’s the point of allowing someone with a lot of business debt to file a Chapter 7 case? When the “means test” was put into bankruptcy law 10 years ago Congress decided that people starting or running a business should not be discouraged from doing so by making it harder for them to discharge their debts if their business were to fail. As a result, if a lot of your debts are from a failed business, you are generally allowed to file a Chapter 7 case and get a fresh start without as much concern about your present income and expenses.

To qualify, your debts must not be “primarily consumer debts.” A “consumer debt” is defined by the U.S. Bankruptcy Code (at Section 101(8)) as one “incurred by an individual primarily for a personal, family, or household purpose.” So as to each one of your debts ask whether that debt was created for any of these purposes or instead for business purposes. Add up the amount that you have for the two different types of debt—consumer and non-consumer. If the total amount of consumer debt is less than the total amount of non-consumer debts, your debts are NOT “primarily consumer debts.” If so, you can avoid the “means test.”

Some “Consumer” Debts Aren’t Really

If you financed the start-up and ongoing operation of your business with what are otherwise sources of consumer credit—credit cards, home equity lines of credit, for example—they may still qualify as non-consumer debt. It’s the purpose for which you incurred the debt that counts. But the evidence about  whether you incurred a debt for a consumer vs. non-consumer purpose could be ambiguous. Discuss this with your attorney to find out how the law would be interpreted in your situation.

Increasing the amount of the debts on the non-consumer side increases the possibility that they total more than your consumer debts, so that you don’t have to take and pass the “means test.”

Your Business Debts May Be Larger Than You Think

The total of your non-consumer (business) debts may be unexpectedly larger than appears to you at first glance, with the result that your non-consumer debts could exceed your consumer debts.

First, certain kinds of business debts can skyrocket beyond their initial amount. For example, the debt from a commercial premises lease that you abandoned could result in a huge obligation based on the unpaid lease payments projected out over the intended length of the lease.

Second, you may have some business debts that you do not even know about. The closing of a business can involve claims raised by the business’ partners, investors, employees, vendors or anybody else allegedly hurt by the business or its closure.

Third, your business’ records may be disorganized or inaccessible so that you may have older debts that you have forgotten about and/or don’t know their current balances.

Again, increasing the amount of debts on the non-consumer side increases the possibility that they total more than your consumer debts, so that you don’t have to take and pass the “means test.”


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