The Business Debt Exception to the Chapter 7 Means Test

If you have primarily business debts, you don't have to pass the means test in order to qualify for Chapter 7 bankruptcy.

The means test determines whether your income is low enough to qualify for Chapter 7 bankruptcy.  However, if most of your debts are business related, you may still qualify regardless of your income.  Read on to learn more about the business debt exception to the means test.

The Chapter 7 Means Test

Congress created the means test to determine if a debtor has enough disposable income to pay back a portion of his or her debts.  The means test compares your average income during the six months prior to bankruptcy with the median state income where the case is filed. 

If your income is below the state median, you automatically qualify to file for Chapter 7 bankruptcy. If it is above median, the means test uses national and local expense standards to decide if you have sufficient disposable income that should be used to pay back creditors. If you fail the means test, you do not qualify to file Chapter 7 and must consider Chapter 13 instead.

(To learn more, see Chapter 7 Eligibility & the Means Test.)

The Business Debt Exception to the Means Test

If your debts are primarily (generally meaning over 50%) business debts you do not have to complete the means test.  So if most of your debts are business related, the means test does not apply to you.  As a result, the business debt exception allows debtors who may otherwise fail the means test to qualify for Chapter 7 bankruptcy.  Below, we discuss what is considered a business debt as opposed to a personal or consumer debt.

What Is a Business Debt?

A debt is usually considered a non-consumer business debt if it was taken out in connection with your business or in hopes of making a profit. Credit cards used to pay business expenses or to purchase items for your business would qualify as business debts.  Also, business vehicle loans, money owed to suppliers or vendors, and business taxes are all business debts. 

Some jurisdictions even consider personal taxes as business debts but others classify them as consumer debts. When it comes to mortgages, if the property was purchased for the business or as an investment property, the mortgage will usually be considered a business debt.

What Is a Personal Debt?

A personal or consumer debt is a debt incurred for a personal or household expense. Personal debts generally include non-business credit cards, car loans, and your home mortgage. Again, some jurisdictions consider your individual tax liability a personal debt while others consider it to be a business debt.  Usually, your home mortgage is the biggest obstacle to qualifying for the business debt exception.

Special Note Regarding the Good Faith Requirement

If you are able to use the business debt exception, it is usually enough to qualify you for a Chapter 7 bankruptcy. However, in addition to the means test each bankruptcy has a general good faith requirement.  In certain cases, courts can disqualify debtors based on a lack of good faith even if they pass the means test.  This is usually the case if debtors have a significant amount of income and their budget can easily be adjusted to pay back a portion of their debts.

For more on business bankruptcy, see Nolo's section on Bankruptcy for Small Business Owners.

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