Consumer v. Non-Consumer Debts for the Bankruptcy Means Test

Find out if a debt is considered to be consumer or non-consumer (business) for purposes of the bankruptcy means test.

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It's 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 non-consumer debt.

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 transaction was.

  • 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 consumer debt.
  • 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 helpful.
  • 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 consumer debt.
  • 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.

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