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. If your income—based on a very distinct way of calculating it—is not low enough, then the means test also looks at your allowed expenses, based on a complicated set of rules looking at national, regional, and local expense standards.
Being able to avoid all these income and expense calculations and thus be allowed to file a Chapter 7 case more easily 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 4 months, instead of being required to pay your creditors all you can afford to pay them for 3 to 5 years in a Chapter 13 “adjustment of debts” case.
The Role of Bankruptcy 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, so that if all their hard work and skill nevertheless resulted in a business venture that did not survive they can lick their wounds and put the financial past behind them. The economy needs people like you to rebound and return to being productive and income-generating members of society as soon as possible.
No Means Test for Certain Business Debtors
One way that bankruptcy law recognizes the need to encourage entrepreneurship is by allowing certain business debtors to avoid having to pass the means test to qualify for Chapter 7.
You can 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 with much less concern about the amount of your income. The law reflects the theme that if your debts are primarily from a failed business, it should be easier for you to file a Chapter 7 case and get a fresh start.
Not “Primarily Consumer Debts”
Section 101(8) of the Bankruptcy Code defines a “consumer debt” at 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 non-consumer (business) debts, your debts are not “primarily consumer debts.” If that’s true for you, you can avoid the means test.
As you add up your consumer and non-consumer debts, the difference may be less clear than seems at first. For example, debts used to finance your business, even if otherwise straightforward consumer credit—credit cards, home equity lines of credit, and such—may qualify as non-consumer debt based on your business purpose of that credit. Talk with a highly experienced business bankruptcy attorney about how the law would label each of your debts.
Also keep in mind 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 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 unexpected liability claims against you. 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, and your home or business are in New Jersey, the Law Office of Andrew B. Finberg can help you understand the means test. Our initial consultation is free. So please call us at (856) 208-4152 to schedule it. Or use this form if that’s more convenient for you. We look forward to serving you.