Written by Summerville Bankruptcy Lawyer, Russell A. DeMott

In prior post about the bankruptcy means test, I focused on the means test as being a tool to sort out Chapter 7 bankruptcy cases from Chapter 13 cases.  However, it’s important to understand that for some cases, the means test doesn’t even apply.

The Two “Tests”

You’ll recall that there are two ways in which your Chapter 7 case may be dismissed for “abuse.”  First, your case may be dismissed if you fail the means test.  Second, your case may be dismissed if you fail the “totality of circumstances” test, which is regarded as being far more important here in the District of South Carolina and in most other bankruptcy districts.

When the Two Tests Don’t Apply

These two tests apply when your debts are primarily “consumer debts.”  “Consumer debts” are defined as those debts incurred for “personal, family, or household purposes.”  But what if your debts are primarily business debts?  What if most of your debt was incurred not for “personal, family, or household purposes” but for a business reason—as an investment or as part of your business perhaps?

Neither Test Applies to “Business” Cases

Then neither test applies.  If you add up your debt and most of it is business debt, you don’t have a “consumer case.”  Instead, you have a “business case” and you note that on your Chapter 7 petition.

What Does This Mean for My Bankruptcy Case?

This means your income doesn’t matter.  It doesn’t matter that you have the ability to repay your creditors.  If you debts are primarily business debts, you don’t fill out the means test, and you don’t have to worry about the totality of circumstances test.

For most debtors, even though they have some business debt, they can’t meet the requirements necessary to declare their case a business case because their mortgage is a consumer debt.  And mortgage balances are usually large compared to the balances of other debts.

But I’m seeing more business cases in our current economic climate.  Most of the time, it’s the result of what I call the “real estate meltdown.”  Lots of people speculated in real estate, and lots of banks were all too willing to fuel the speculation with generous loans.  So for some of these folks, they do have business cases.  And for others, they are self-employed and have built up substantial business debt trying to keep their businesses afloat.

Why Is the Law This Way?

This is nothing new.  It’s not a provision of our new Bankruptcy Code, BAPCPA (“Bankruptcy Abuse Prevention and Consumer Protection Act”).  It’s been in the Bankruptcy Code for a few decades, in fact.

Consumer debt has always been viewed as being less “worthy” of discharge than business debt.  After all, America is all about capitalism.  Starting businesses, inventing new products and services, and taking business risks are viewed as worthy endeavors.  Taking too many cruises, eating out too much, driving expensive cars, and having more house than you can afford has never been looked on with much sympathy.  To those debtors, the Bankruptcy Code basically says, “to whom much is given, much shall be required.”  The Code then “tests” your ability to repay your creditors, and that testing was the subject of my first four posts on the means test.

A Kinder and Gentler System

But if your debts are primarily business debts, the system will be kinder and gentler to you.  This underscores an important point: if you have a case in which you think your debts are primarily business debts, you need to be able to prove it.  Make sure you have all your records available for your bankruptcy lawyer.

Related posts:

1. Chapter 7 Bankruptcy: The Means Test (Part One)
2. The Bankruptcy Means Test (Part Three)
3. The Bankruptcy Means Test (Part Two)