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.

It's usually relatively simple to determine whether a debt is a consumer or non-consumer debt for the purposes of the Chapter 7 means test. If most of your obligations are business debts, your income won’t need to meet the means test qualification requirements. You should keep in mind, however, that when an individual files a business bankruptcy, the bankruptcy trustee and court will review these debts carefully and might require proof.

Read on to determine if a debt is consumer or business in nature.

Is it a Business or Consumer Debt?

Determining the category of a debt can be the subject of disputes in bankruptcy cases. In general, the following definitions apply:

  • Business debt is anything that doesn’t qualify as consumer debt. It’s often referred to as non-consumer debt.
  • Consumer debt is a debt incurred by an individual for primarily personal, family, or household purposes. Anything else is non-consumer debt.

A good rule of thumb is to look at what you used the money for rather than where you got it or the name of the transaction type. For instance:

  • If you used the money to pay a personal, family or household expense, or to purchase personal, family or household goods, it’s probably a consumer debt.
  • If you used it to pay something else, it is likely non-consumer and therefore, a business debt.

You’ll use the date the debt was incurred to determine its status. If you incurred the debt for a consumer purchase (such as a personal computer) and later used the property in your business, the debt will be a consumer debt.

Why the Business and Consumer Debt Distinction Matters

The means test, the lengthy financial calculation which decides whether or not you are eligible to receive a Chapter 7 discharge (the order that wipes out qualifying debt) doesn’t apply if your debts aren’t mainly consumer debts. If more than half of your debts are non-consumer (business) debts, you can file for Chapter 7—and receive a discharge—without taking or passing the means test.

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 doesn’t 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 you’ll be required to take the means test.

Examples of Business and Consumer Debt

  • 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 particular cards for business expenses, this determination would 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.

Providing Documentation

Whether debts are consumer or business debts is often looked at closely in a bankruptcy proceeding. You’ll need to have supporting documentation for anything you are classifying as business or non-consumer debt. It will be your burden to show the purpose of the debt at the time you incurred it.

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