not always easy to determine if a debt is consumer or non-consumer for
purposes of the Chapter 7 means test. If you classify most of your
debts as business debts, the bankruptcy trustee and court will review
these debts carefully.
Read on to learn why this distinction matters and how to determine if a debt is consumer or business.
Why the Distinction Is Important
The means test, the dreaded lengthy financial calculation which
decides whether or not you are eligible to file a Chapter 7, does not
apply if your debts are not primarily consumer debts. This means that if
more than half of your debts are non-consumer (business) debts, you can
file for Chapter 7 without taking or passing the means test.
(To learn about the means test, see The Means Test & Other Chapter 7 Eligibility Issues.)
Definitions of Business and Consumer Debts
Business debt is not defined by the bankruptcy law -- instead, it is
anything that does not qualify as consumer debt. It is often referred to
as "non-consumer" debt.
Consumer debt is defined as a debt incurred by an individual for
primarily personal, family, or household purposes. Anything else is
What Does "Primarily" Consumer Debt Mean?
The bankruptcy law states that the means test applies to anyone who
has primarily consumer debt. The courts have interpreted this to mean
half or more. If at least half of your debt is consumer debt, you need
to take the means test.
Dollar amount standard. Most courts find that if
greater than half of the dollar amount of your debt is non-consumer or
business, the means test does not apply.
Number of debts. A small number of courts require
that the business debt also be greater than half of your debts in
number. If more than half of your debt in dollars is business debt but
it is less than half of your debts in number, you should check with an
experienced bankruptcy attorney in your area to see whether the courts
in your district will require that you take the means test.
Determining Whether Debt Is Business Debt or Consumer Debt
Determining whether a debt is business debt or consumer debt is not
always as easy as it would seem. It is often the subject of disputes in
bankruptcy cases. A good rule of thumb is to look at what the money was
used for rather than where you got it or what the name of the
- If the money was used to pay a personal, family or household expense
or to purchase personal, family or household goods, it is probably a
- If it was used to pay something else, it is likely non-consumer and therefore, "business."
The determination is also made as of the time that the debt was
incurred. If a debt was incurred for a consumer purchase (such as a
personal computer) and later the property was used in your business, it
is still considered a consumer debt.
Examples of Debt Classification as Business or Consumer
- Taxes. Taxes, including income taxes, are generally
not consumer debts. Most courts consider taxes to be non-consumer debt.
Although this sounds odd, it's because no one voluntarily "incurs" tax
debt for personal, family, or household purposes.
- Student loans. Some courts count these as consumer
and some not. You need to check with an experienced bankruptcy attorney
in your area. Gathering documentation to show what the student loan was
used to pay for (tuition and books, or living expenses and food) may be
- Credit card debt. If you were careful to use only
certain cards for business expenses, this determination will be easier
but it is likely that you will need to go through your statements to
determine whether the individual purchases were for consumer or
non-consumer purposes at the time the purchase was made. Purchases of
business inventory and equipment, or cash advances deposited into the
business to pay business expenses are not consumer debt. Daily lunches
and gas for your daily commute are probably consumer debt.
- Mortgages. Mortgages on your house are consumer
debt. Mortgages on your business property are business debt. A mortgage
on a property that you resided in when you mortgaged it, but is now a
rental property, remains a consumer debt. A mortgage on property you
purchased as an investment property to rent out is a business debt.
- Car loans. If you purchased a truck to use only in
your construction business, this is a business debt. If you simply use
your family car to make business sales calls, it is a consumer debt.
- Medical bills. Surprisingly, necessary medical
expenses are often classified as non-consumer debts and therefore
qualify as business debts. As with tax debts, this is because usually
you don't voluntarily "incur" medical debt. If the medical expense is
for elective cosmetic surgery, however, it could be classified as
- Domestic support obligations. Most courts consider these to be consumer debts.
- Personal Guarantees. Personal guarantees of business debts are not consumer. They remain business debts.
- Legal fees. If they are incurred for family or
household purposes such as divorce, child custody and support
obligations, they will most likely be considered consumer debt. If they
are incurred in connection with business disputes, they are non-consumer
or business debt.
- Accident liabilities. These are not consumer debts and are considered business debts.
Documentation Is Necessary
Whether debts are classified as consumer or business debts is often
looked at closely in a bankruptcy proceeding. You need to have
supporting documentation for anything you are classifying as business or
non-consumer debt as it will be your burden to show what the purpose of
the debt was at the time it was incurred.