Using the Business-Debt Exception to the Bankruptcy Means Test
Debtors who are considering filing for bankruptcy protection under Chapter 7 must meet the means test, which is designed to make this remedy unavailable to people with sufficient incomes to pay off all or a portion of their debts. If the debtor’s income for the prior six months is higher than the median income in the state of filing, he or she is ineligible for Chapter 7 unless they satisfy specific conditions.
However, the means test pertains only to “primarily consumer debt” — that which is incurred mainly for personal, family or household purposes. The means test does not apply to business debt. If a Chapter 7 petitioner’s total debt consists of more than 50 percent business-related obligations, the debtor is automatically qualified for filing a Chapter 7 petition.
To distinguish consumer debt from business debt, bankruptcy courts use the “profit motive test.” If the debt was undertaken to support a business, it will be viewed as business debt. So while a mortgage for the purchase of a family home is generally viewed as a consumer debt, a mortgage on another property that has been bought for investment purposes or rental income could be considered a business debt.
Distinguishing consumer debt from business debt is not always a simple task. For instance, many small business owners use their business credit cards for entertainment or meals. As such, those debts might be considered personal unless a business-related purpose is established. Home equity lines of credit and other loans secured by personal assets may be considered a business debt if the funds are used for investment in a business. Other debts that may be found business-related are:
- personal guarantees on liabilities arising from a business
- debts owed to business vendors and suppliers
- loans for purchase of business vehicles
An experienced bankruptcy attorney can examine your debt portfolio to make sure your debts are properly characterized. We have used this business debt exception to the means tests to help many of our clients qualify for Chapter 7 bankruptcy and thereby discharge all of their dischargeable debts.
However, a Chapter 7 petitioner cannot use the business-debt exception in bad faith. Bankruptcy protection may be denied to a debtor who qualifies for the exception but who nevertheless has substantial income and yet makes no effort to pay off business creditors.
At the Law Offices of Michael Jay Berger, we counsel people on the availability of Chapter 7 to resolve their debt problems. Our Beverly Hills lawyers have decades of experience handling a full range of bankruptcy matters. Schedule a free initial consultation by calling 310-271-6223 or contacting us online.