The Business Debt Exception to the Chapter 7 Means Test

The US Congress developed the means test to determine if the debtor adequate disposable income to repay a portion of his/her debts.  The means test was added as an eligibility requirement to Chapter 7 bankruptcy in 2005.  The means test compares the debtor’s average income in the six months ahead of bankruptcy with the state median income where the bankruptcy case is recorded.  In other words, the means test determines whether the debtor’s income is low enough to qualify for Chapter 7 bankruptcy.  If the debtor’s income is below the state median, s/he is eligible to file for Chapter 7 bankruptcy.

The means test is aimed to filter higher-income debtors from succeeding for Chapter 7 bankruptcy.  Such higher-income debtors are bound to repay some of his/her debt in Chapter 13 bankruptcy.  If a debtor’s income is lower than the state median income s/he can file in Chapter 7 bankruptcy.  Alternatively, if a debtor’s income is higher than the state’s median income, s/he must qualify the means test by comparing the income with certain allowable expenses to calculate the capacity to repay certain portion of his/her unsecured debt.

Business debt exception to the means test is a pivotal immunity in Chapter 7 bankruptcy for a business debtor.  The means test only relates to individuals whose debts are principally consumer debts as against to business debts.  The debtor can mark the means test declaration that his/her debts are primarily non-consumer debts and s/he can avoid the remaining means test process.  If a debtor’s balance is more than 50% non-consumer debts, the debtor is automatically eligible to file Chapter 7 bankruptcy.

Consumer debts are debts incurred by an individual mainly for personal, family, or domestic purpose.  To distinguish the consumer debts and non- consumer debts, the bankruptcy courts developed the profit motive test.  In the profit motive test, the court observed that if the debt was incurred to make profits, such debts should be classified under non- consumer debts or business debts.  For example, if a debtor mortgages on an individual home; it would come under consumer debt.  However, if it was a vacation home and the purchase was intended as an investment and rental; such debts come under business debts.  Similarly, some business owners use their personal credit cards for business purposes and such debts become a business debt.  Moreover, business debts include personal guarantees on business liabilities, investment losses, and motor vehicle accident liabilities.

However, the business debt exception has certain limits.  Business debt exception is not a loophole to by-pass the means test and it should conform to all the good faith requirements.

In certain situations, courts may disqualify debtors according to deficiencies in good faith regardless of whether they qualify the means test.  It is usually true that the debtors have a significant level of revenue in addition to their budget can easily possibly be adjusted to repay a portion of these financial obligations.


Inside The Business Debt Exception to the Chapter 7 Means Test