You May Not Need to Take the “Means Test” If You Are a Business Debtor

Cartoon of frightened business owner The means test is the gateway for qualifying to get a fresh financial start through a Chapter 7 “straight bankruptcy” case. This test is based first on your income and then, if your income is not low enough, also on your allowed expenses, all based on a very complicated set of rules. Being able to avoid all this and be allowed to file a Chapter 7 case regardless of your income and expenses can be a huge advantage. It can allow you to discharge (permanently write off) all or most of your debts with a procedure that generally takes no more than four months, instead of being required to pay your creditors all you can afford to pay them for three to five years in a Chapter 13 “adjustment of debts” case.

Bankruptcy Is Especially Designed for Business Debtors

Qualifying for Chapter 7 in order to discharge your debts may be especially important to you if you operated a business that has failed. One of the most important functions of the bankruptcy system is to encourage entrepreneurs to take risks by enabling them to put the past behind them if all their hard work and skill nevertheless resulted in a business venture that did not survive. The economy needs people like you to be able to dust yourself off and return to being productive and income-generating members of society as soon as possible, unencumbered by debilitating debt.

Avoiding the Means Test for Business Debtors

Bankruptcy law recognizes the need to encourage entrepreneurship in various ways, one of which is by allowing certain business debtors to avoid having to pass the means test to qualify for Chapter 7.

You completely avoid the means test if your debts are not “primarily consumer debts.” If so, you could file a Chapter 7 case and discharge your debts regardless of the amount of your income. This reflects the attitude in the law that if your debts are primarily from a failed business, you should be allowed to file a Chapter 7 case and get a fresh start regardless of the amount of your present income and expenses.

The Meaning of Not “Primarily Consumer Debts”

Section 101(8) of the Bankruptcy Code defines a “consumer debt” as one “incurred by an individual primarily for a personal, family, or household purpose.” If the total amount of all your consumer debts is less than the total amount of all your nonconsumer (business) debts, you are considered not to have “primarily consumer debts.” If that applies to you, you can avoid the means test.

When counting up your consumer and nonconsumer debts, be aware that this may be less clear than it may seem at first. For example, if you financed your business with what seems to be consumer credit — credit cards, home equity lines of credit and such — they may still qualify as nonconsumer debt based on the purpose of those uses of credit. You need to talk with a highly experienced business bankruptcy attorney about how the law would be applied to your debts.

Also be aware that you may have more business debt than you think. Some of your business debts may be much higher than you assume, and you may even have some altogether unexpected business debts. If you surrendered leased business equipment, for example, you may be liable for the string of missed and future contractual payments. You may have claims against you that you have not been informed about. These are all the more reason to confer with an attorney before assuming that you have “primarily consumer debt” and are stuck with needing to take and pass the means test.

If you have operated or are still operating a business and are now considering your options, I can help you through all of this. I will review your options with you and help you execute the best game plan going forward. Please call us at 972-772-3083 , or use this form to contact me today.

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