You only have to pass the means test if you have “primarily consumer debts.” If you have more business debts, skip the means test.
The Consumer “Means Test”
Our last blog post introduced the “means test.” It’s used to see if you qualifying for Chapter 7 “straight bankruptcy.” If you don’t qualify, you may instead have to file a Chapter 13 “adjustment of debts” case requiring a 3-to-5-year payment plan.
But the means test only applies to consumer bankruptcy cases. Otherwise you can skip the means test.
The official Voluntary Petition for Individuals Filing Bankruptcy form asks the following two questions:
16a. Are your debts primarily consumer debts? Consumer debts are defined in 11 U.S.C. § 101(8) as “incurred by an individual primarily for a personal, family, or household purpose.”
16b. Are your debts primarily business debts? Business debts are debts that you incurred to obtain money for a business or investment or through the operation of the business or investment.
If you answer “no” to the first question (and usually “yes” to the second question), than you skip the means test. This can be a significant advantage because you may otherwise not qualify under Chapter 7.
How this Exception Fit’s into the Purpose of the Means Test
The purpose of the “means test” is to only allow you to go through a Chapter 7 case if you don’t have the “means” to pay a meaningful amount of your debts to your creditors. If your income is no more than the “median income” for your family size in your state, the law assumes you don’t have the “means” to do so. Next, if your income is more than the median amount, then your allowed expenses are carefully reviewed to see if you do have enough “means” left after your expenses.
When Congress created the means test, it decided to apply the test only to individual consumers, not to businesses and business owners.
The mechanism that Congress used to divide between consumers and business is the phrase: “primarily consumer debts.” All those with “primarily consumer debts” have to take the “means test” to qualify for Chapter 7 relief. Those without “primarily consumer debts” do not have to take the “means test.”
Not “Primarily Consumer Debts”
If the total amount of all your consumer debts is less than the total amount of all your non-consumer (business) debts, your debts are not “primarily consumer debts.” If so, you can avoid the “means test.”
Section 101(8) of the Bankruptcy Code defines a “consumer debt” at as one “incurred by an individual primarily for a personal, family, or household purpose.”
As you add up your consumer and non-consumer debts, realize that you may have more business debt than you think for two reasons.
First, debts that you would normally consider consumer debts might not be. For example, debts used to finance your business, even if otherwise straightforward consumer credit—credit cards, home equity lines of credit, and such—may qualify as non-consumer debt based on your business purpose of that credit. (Note the explanation to the question in the bankruptcy petition quoted above, that business debts include both those incurred in funding the business and in operating it.)
Second, some of your business debts may be larger than you think. For example, If you surrendered a leased business premises or business equipment you would likely be liable not just for the missed lease payments owed at the filing of the bankruptcy but also potentially for the string of future contractual payments, depreciation, and other possible charges.
Through a combination of these two considerations, your total business debt may be much more than you expected. So you might have more business debt than consumer debt.
You may not be in a position—given your income and the expenses you’re allowed—to pass the means test. If you have ANY business debts, be sure to ask your bankruptcy lawyer to see if you qualify for this not-“primarily consumer debt” exception.