by Jeff Smoot

Individual debtors contemplating filing bankruptcy dread the “means test,” a formulaic test designed to determine whether, based on a consumer debtor’s income, the case should be permitted to proceed under Chapter 7. If the debtor’s income is above the median annual income for that geographical region (in the Seattle area, the current median income for a household of one person is $51,616, $63,930 for two, $72,275 for three, $82,422 for four), it is presumed that the debtor has the ability to repay some debts, and, therefore, filing Chapter 7 bankruptcy to discharge those debts would be an abuse of the Bankruptcy Code. Such a filing can be dismissed under section 707(b) of the Bankruptcy Code based on a “presumption of abuse.”

Although the means test applies to most individual debtors, it does not apply to debtors whose debts are primarily “non-consumer” debts. That is, if more than half of a debtor’s total debt is not “consumer” debt, they don’t have to pass the means test to file Chapter 7. In fact, they don’t even have to take it.

What is “non-consumer” debt? Anything that is not “consumer” debt, which is defined in the Bankruptcy Code as any debt incurred by an individual for primarily personal, family, or household purposes. So, debt incurred to buy your home, remodel your kitchen, pay for living expenses, buy a family car, take a vacation, most credit card charges, legal fees for divorce, child support and maintenance, and loans to pay off or consolidate credit card debt, for example, would be consumer debts. Anything else is non-consumer debt. If at least half of your debt is consumer debt, in dollar amount, you have to take and pass the means test to be eligible to file Chapter 7.

Non-consumer debt is often equated with “business” debt, and business debt (generally regarded as any debt incurred with a profit motive) is definitely non-consumer debt. For example:

• Rental/Investment Property. Any debt incurred to finance, maintain, or improve income-producing rental property or investment property is non-consumer debt. In fact, if your current home was originally purchased as income-producing rental property, the mortgage is considered non-consumer debt even though you now live in it. But if you made the purchase with the intent to live there some time in the future, it could be considered consumer debt.

• Second Mortgage/HELOC. If you took out a second mortgage on your home and used the loan to capitalize your business, that is non-consumer debt.

• Credit Card Debt. If you made credit card purchases for your business, those purchases are non-consumer debt. These are more easily traced if you use a particular card only for business purchases.

• Car Loans. Debt incurred to purchase or maintain a car used exclusively for business would be non-consumer in nature; if the car is partly for personal or family use, it may not be.

• Personal Guarantees. A personal guaranty of a business debt is not a consumer debt. However, co-signing on a child’s car loan or apartment lease would be consumer debt because it is incurred for a family purpose.

In addition, some types of non-business debt are also treated as non-consumer debt in most cases. For example:

• Student Loans. In some jurisdictions, student loan debts are not counted as consumer debts unless the loan proceeds were used for family expenses rather than educational expenses. In other jurisdictions, student loans are considered consumer debts without regard to how the funds were used.

• Taxes. Although everyone pays income taxes, courts generally do not consider them to be consumer debts because they are imposed rather than voluntarily incurred, and are not incurred for personal, family or household purposes.

• Medical Bills. Like taxes, medical bills are not generally treated as consumer debts because no one voluntarily incurs them, except for purely elective cosmetic procedures which may be treated as consumer debts.

• Liability for Personal Injury Claims. If you accidentally injure someone, that liability is generally not treated as consumer debt because it was not incurred for family, household, or personal purposes.

If you file a non-consumer Chapter 7 case, you should expect to have your filing closely scrutinized and possibly challenged as an abusive filing by the trustee, creditors, or the U.S. Trustee. The debtor has the burden of proving that the debts are primarily non-consumer in nature. If you have documented all of your claimed non-consumer debts ahead of time, simply providing the objecting party with your documentation should resolve the issue. If it does not, you will have to prove to the Bankruptcy Court that your debt is primarily non-consumer in nature, possibly in a contested motion or trial. Courts will generally examine the nature of the debt, what it was incurred for, and how the money was spent rather than the label or category placed on it. Again, if you have sufficient documentation to back up the nature and characterization of the debt, you should be able to survive a challenge to your non-consumer debtor Chapter 7 filing.

If you need advice regarding a possible non-consumer bankruptcy filing, you should consult with an experienced bankruptcy attorney.

This article is for informational purposes only, and should not be relied upon as legal advice. No attorney-client relationship is created or intended by publication of this article. If you desire legal advice or representation regarding the issues discussed in this article, please contact Highpoint Law Group PLLC.

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