Bankruptcies –Consumer Debt vs Non-Consumer Debt (Chapter 7)

January 20, 2014

There is still the belief among many that the 2005 amendments to the Bankruptcy Code make it more difficult for consumers to file for Chapter 7 bankruptcy protection.

It is important to note that the majority of the 2005 amendments apply to consumer debtors and consumer debt.   The majority of the amendments do not apply to individuals with primarily non-consumer debt.

Although to some extent it may be true that the 2005 amendments make it more difficult for consumers to file for bankruptcy, you need to look deeper into the nature of your debts.

Means Test (prior to 2005 there was no means test):    One of the major changes of the bankruptcy code for 2005 was the instituting of a means test.   Simply put, a debtor or a debtors’ household earnings which are more than the average household in their respective geographical location, has to provide detailed financial information with respect to the six-month period immediately preceding the filing the bankruptcy petition.  If they pass the means test, a debtor is eligible for Chapter 7.   If you do not pass the means test, you are not eligible for Chapter 7 and other options must be evaluated.

Most people don’t realize that the means test only applies to individuals with primarily consumer debt.

What are consumer debts?

Consumer debts are debts that have been incurred by an individual primarily for a personal, family, or a household purpose.

In other words, all those credit card charges at your electronic stores and clothing stores are consumer debts.

What are non-consumer debts?

Non-consumer debts are debts that are incurred with an eye towards profit and not primarily for personal, family or household purposes.

In other words, individual debts incurred as a result of a business or investment properties are non-consumer debts.   Personal guarantees of business loans, lines of credit, etc. for your business are non-consumer debts.

Many courts have held that certain income taxes and medical debt also fall in this category of non-consumer debts.  There was also a recent decision that non-dischargeable student debt should not be viewed as consumer debt given that the individual incurred the student loan debt with an eye towards profit (if the debtor became a dentist, he would be incurring the debt for a profit purpose notwithstanding the fact he did not complete his education).

 

Why is all of this important?   

It is very important to have a qualified bankruptcy attorney evaluate your case and your specific debts.   This is to ensure that the attorney has the correct information to make the determination of whether the new 2005 laws apply to your case or not.    It may be that the means test does not apply to your case, thereby making it easier to qualify for a Chapter 7 bankruptcy.

For this reason, I do not go over a potential client’s case over the phone, a detailed consultation is needed (which is free of charge) to assure the best service and advice is provided to my clients.