Written by Craig D. Robins, Esq.
When debts are primarily business debts, a debtor is excused from the means test
Last night I conferred with a client who did not pass the bankruptcy means test. Ordinarily, passing the means test is a prerequisite for being eligible for Chapter 7 bankruptcy filing. However, failing the means test was not a problem for this client. Most of his debts were the result of personal guaranties on a failed business.
The debtor had operated several automobile dealerships on Long Island. Unfortunately, due to the problems with the economy, the dealerships recently went out of business, leaving the debtor on the hook for almost two million dollars in corporate debt that he personally guaranteed.
When we plugged all of his data into the means test, he did not pass. However, the Bankruptcy Code states that if debts are primarily non-consumer debts, the debtor is exempt from the means test, and the means test does not have to be filled out.
We will therefore be able to file his Chapter 7 bankruptcy petition even though he fails the means test.
What does consumer debt include? Consumer debt includes debt incurred for personal, family, or household purposes. That would encompass typical credit card debt, utility bills, medical bills, car loans and mortgages. However, obligations resulting from business are not considered consumer debt.
How much debt must be non-consumer debt in order to be exempt? The bankruptcy statute uses the word, “primarily.” That means at least 50%.
Keep in mind that you must include the full balance on a mortgage as part of consumer debt. Since most business owners own mortgaged homes with mortgages totaling several hundred thousand dollars, the amount of business debt must be quite substantial in order to invoke the exemption.
Also note that if a credit card was used to pay business expenses, then the credit card debt is not a consumer debt.
Click here to see a copy of the bankruptcy means test form . For more information on the means test, see my post, The Means Test is Often the Key to a Successful Chapter 7 Bankruptcy Case .