The Business Debt Exception to Chapter 7 Means Testing
One of the most noteworthy changes to the bankruptcy code with the adoption of the 2005 BAPCPA amendments was the requirement that chapter 7 debtors have to under go means testing. The means test examines a debtor’s income to determine if they qualify for chapter 7 relief.
One exception to the means test is a non-consumer debtor. Generally this is a debtor whose debts are primarily business debt. In order to qualify for this exception the debtor’s business debt must exceed their consumer debt. (more then 50%).
A debt is usually considered a business debt or non-consumer if it was taken out in connection with the debtors business, typically a business credit card or loan taken out by the individual or guaranteed by the individual. Credit cards used to pay business expenses or to purchase items for the business would qualify as business debts. In many jurisdictions personal taxes are considered non-consumer debt and would go toward the exception, although other jurisdictions classify tax debt as consumer debt.
In order for the debt to qualify the individual debtor must be liable for it. This is an important issue because depending on the business structure, the debtor may not be liable. Most business structures have some kind of liability shield that protects the individual from the business’s debt. In most cases, if your business is organized as a sole proprietorship or general partnership, you will be on the hook for all of your company’s debts. But if you have a corporation or limited liability company (LLC), creditors typically can’t go after your personal assets to satisfy business debts unless you personally guaranteed or cosigned the obligation.
The largest debt that most consumers have is their mortgage. The mortgage debt is considered in the equation and the debtor must use the total amount of the debt. However, when it comes to mortgages, if the property was purchased for a business or to be used as an investment or rental property, most jurisdictions would consider this a non-consumer debt.