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Lots of business debt can allow you to qualify for Ch. 7 more easily

If you owe more business/non-consumer debt than consumer debt, then you avoid not only the “means test” but also some other roadblocks to a successful post-business Chapter 7 bankruptcy case.

What’s the “Means Test” and Why Does It Matter?

Bankruptcy law says that if your income is more than a certain amount, you have to pass a means test to be able to go through a Chapter 7 case successfully. One way to avoid this means test is by having less income than the permitted median family income for the state in which you live. But the median family income amounts are relatively low. If your income is above the applicable median amount, you have to go through the entire means test at the risk of being forced into a 3-to-5-year Chapter 13 payment plan instead of three-month Chapter 7 liquidation.

Debtors with More Non-Consumer Debts than Consumer Debts

You can skip the means test altogether if your debts are not primarily consumer debts. This way you could be eligible for a Chapter 7 case even if your income is above the median level. Indeed, you avoid other kinds of “presumptions of abuse” as well, not just the formulaic means test, but also the broader “totality of circumstances” challenges. Congress decided that if most of your debts are from a failed business venture, you should be allowed a fresh start through Chapter 7, regardless of your current income and expenses.

What is a “Consumer Debt”?

The Bankruptcy Code defines a “consumer debt” as one “incurred by an individual primarily for a personal, family, or household purpose.”

The focus is on the reason why you incurred the debt. If you made a credit purchase or took out the loan for your business, then it may not be a “consumer debt.” That is a factual question that must be decided separately for each one of your debts.

“Primarily Consumer Debts”?

The Bankruptcy Code does not make this crystal clear, but generally if the total amount of consumer debt is less than the total amount of non-consumer debts, your debts are not primarily consumer debts. And then you do not have to mess with the means test.

Seemingly Consumer Debts May Not Be

Small business owners often finance the start up and operation of their businesses with what would otherwise appear to be consumer credit—credit cards, home equity lines of credit and such. These may qualify as non-consumer debts in calculating whether you have primarily consumer debts. Your use of various forms of personal credit to fund your business is something to discuss with your attorney.

Unexpectedly High Business Debts Can Help

Sometimes business owners end up with business debts larger than they thought they would have when their business closed. For example, if you had to break a commercial lease when you closed your business, the unpaid lease payments you owe could be huge. Or your business closure may have left you with other unexpected debts, such as obligations to business partners or litigation resulting in damages owed. The good side of larger-than-expected business debts is that they may allow you to skip the means test and other grounds for dismissal or conversion to Chapter 13, allowing you to discharge your debts through a Chapter 7 .

For bankruptcy in Northern New Jersey, call: (201) 676-0722.

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