Primarily Business Debtors Exempt from Means Test

The bankruptcy means test does not apply to individual debtors with primarily non-consumer debt such as business debts.  Sounds simple enough, but there is lots of room for argument over the application of this rule.

What is  non-consumer debt?  The bankruptcy code defines consumer debt as debt incurred for personal, family, household purposes. 11 U.S.C. 101(8).  Business debts are not consumers debts.  Most courts says taxes, even personal income taxes, are not consumer debts.

What does primarily mean?  If more than 50% of the debt is non-consumer debt, the means test does not apply to the debtor.  Most courts define primarily as more than half.

When do you count the debts? One court said a vacation rental mortgage still counted as a consumer debt because it was incurred as a personal home mortgage.  The court counted the intention of the debt at the time it was incurred, not the nature of the debt at the time of the bankruptcy.

Do you count mortgage debts?  Yes, most courts count mortgage debts in the determining whether the means test has to be passed.  Many debtors with business debt fail the “primarily non-consumer debt” test because of their home mortgages.

Can the case with primarily non-consumer debts still be dismissed for abuse?  The Courts are split on this issue.  The U.S. Trustee is pushing for dismissal of cases by debtors with ability to pay debts and other abuses, arguing the totality of circumstances.   Debtor advocates say totality of the circumstances does not apply in non-consumer debt cases because a motion to dismiss under 11 U.S.C. 707(b)(3) is subject to subsection “1″ of § 707(b)(3).

In conclusion, debtors with non-consumer debts claiming they  are exempt from the means test requirement should anticipate a challenge to their case.  They should stand ready to prove their debts are more than 50% non-consumer debts.

Practitioners know that the bankruptcy forms (schedules) do not readily gather, summarize or total the information for this purpose. Practitioners may want to create a separate chart or spreadsheet to prove their clients’ case.  The petition should indicate business case.  The individual debts on schedules D, E and F should be carefully labeled business or consumer in the notes.  Practitioners will want to look behind the type of debt such as credit card debt and home equity lines of credit to determine the purpose for which the debt was incurred if an argument can be made the debts were incurred for non-consumer purposes.

The schedule I and J should be carefully prepared with great attention to detail in case the U.S. Trustee uses the budget to argue the debtor has ability to repay debts.  A wise practitioner will prepare a hypothetical means test to see how his client fares if the non-consumer debt argument is lost.

In conclusion, whether or not the debtor is exempt from the bankruptcy means test because his debts are primarily non-consumer debts is fact specific and will involve case by case analysis and documentation.  As with most issues in bankruptcy, the courts have reached different results in similar circumstances.  Hiring an attorney with extensive experience representing debtors with large debt loads and high incomes is recommended.

Read more about the means test income guidelines on the Bankruptcy Law Network and the Kansas changes on the Kansas Bankruptcy Information blog.