What is “consumer debt” in bankruptcy? One of a series.

14 Dec What is “consumer debt” in bankruptcy? One of a series.

Back in 2005, Congress passed a new bankruptcy law called BAPCPA. Supposedly, this law would prevent bankruptcy abuse and protect consumers. It hasn’t worked out that way. Many people feel that BAPCPA helped bring about the financial meltdown which has been ruining our economy and the lives of millions of American families.

One way Congress tried to “help” was by enacting a “means” test. People above the median income are presumed to be abusing the bankruptcy system if they try to file a chapter 7 bankruptcy case – the kind of case where you discharge your debts. Congress would rather that such people file chapter 13 cases and pay all their disposable income to their creditors for five years.

You may not have to file a chapter 13 case as an “above-median income debtor” if you pass the means test. And the very interesting point is that the “means test” – the test for a person to “overcome the presumption of abuse” – only applies to debtors whose debts are “primarily consumer debts.”

So for a debtor whose debts are not primarily consumer debts, the means test doesn’t apply – that debtor gets a much shorter path to discharge in bankruptcy.

Consumer debts are defined simply. These are debts

“incurred by an individual primarily for a personal, family or household purpose”

A few points should be made. A consumer debt is only a debt by an individual. You look at the debt at the time it was incurred. If at the time, it was for personal, family or household purposes, it’s a consumer debt. Debt on a property bought as a house and converted to rental is still a consumer debt. Debt on a computer used for business but converted to personal use would still be a business debt.

A person who invested in real estate and then moved into the house might have primarily business debts. But a person who lived in a condominium and now is trying to keep the property as an investment still might be deemed to have primarily consumer debts.

Lakelaw represents people in difficult consumer bankruptcy cases in Illinois and Wisconsin. Click here for more information about “consumer debt.”

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.

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