Chapter 7 Bankruptcy Means Test and Business Debt Exception
Qualification for a Chapter 7 bankruptcy is dependent on a means test which determines whether your income is low enough. If your debt is mostly business related, you may still qualify for a Chapter 7 bankruptcy regardless of your income.
The Chapter 7 bankruptcy means test was created by congress to determine whether a debtor has enough disposable income to pay back part of his or her debt to creditors. This test compares your average income for the past six months before filing the bankruptcy petition to the state median income. The state median income is used from the state in which the bankruptcy is filed. You will automatically qualify for a Chapter 7 bankruptcy if your disposable income is below the state median. If your disposable income is above the state median income, the means test utilizes local and national expense standards to assess whether you have adequate disposable income that can be used to pay creditors that you are owing. You do not qualify for a Chapter 7 bankruptcy if you fail the means test. If you do not qualify for a Chapter 7 bankruptcy, you may consider a Chapter 13 bankruptcy.
Business Debt Exception
The Chapter 7 bankruptcy means test does not have to be completed if your debt is primarily business related. This means that more than 50% of your debt was accumulated due to business operations and activities. This allows the debtor who would have otherwise failed the means test to qualify for a Chapter 7 bankruptcy via the business debt exception.
Business debt is considered different from personal or consumer debt. A debt accrued by you in connection with your business with the intention of making a profit is considered a non-consumer business debt. Purchases for your business and payments of business expenses that have been made by credit card would qualify as business debt. Business vehicle loans, money owed to suppliers and service providers to the business and business taxes are all considered as business debts. Certain jurisdictions consider personal tax as business debt while other jurisdictions classify them as consumer debt. Mortgages that were taken for property that was purchased for business use or investment are usually considered to be business debt.
Personal or Consumer Debt
A debt accrued or accumulated for a personal or a household expense is considered a personal or consumer debt. These debts generally include personal credit cards, your home mortgage and car loans. As mentioned above, some jurisdictions consider personal tax as a business debt and others consider personal tax as a personal or consumer debt. Often, your home mortgage is the biggest obstacle for qualifying for business debt exception.
It is usually enough to qualify for a Chapter 7 bankruptcy if you are able to use the business debt exception. General good faith is required by the means test. The court can disqualify debtors in certain cases if the court decides that the debtor has adequate income and the budget can be adjusted in order to pay back some of the debts. This is based on the lack of good faith even if the debtor has passed the means test.