4 Debts That Aren’t Consumer Debts for the Purposes of the Means Test

Most Las Vegas bankruptcy lawyers are not fans of the chapter 7 means test, which was inserted into the bankruptcy code in 2005. The purpose of the test, along with the two financial management courses and other changes to the bankruptcy code, was to frustrate debtors’ ability to discharge their debts. Banks (as always) feared that debtors were abusing the bankruptcy code, even though there was scant if any evidence that they were doing so. Thus, debtors must now show that their incomes do not exceed the median family income for the state in which they live.

However, the existence of the test doesn’t mean that everyone who wants to file in chapter 7 must do so. It actually depends on the types of debt one owes. In 11 U.S.C. 707(b), the bankruptcy code allows the bankruptcy court after a hearing to “dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor’s consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.” [emphasis added] This means that debtors whose incomes are above the median family income for their state may proceed with a chapter 7 filing if their debts aren’t consumer debts. Here are some examples:

• Business debts – If your business buys goods and services on credit and goes bust, you can still use chapter 7. Rarely, however, does a business go bust while the principals earn more than the state’s median family income. Trustees might also look for evidence of bankruptcy fraud of the bust-out variety.
• Tort debts – For example, if you injured someone in a car accident, you might be able to discharge it. Usually drunk driving debts are excluded from discharge.
• Debts incurred for a profit motive – If you took out a loan to buy stock, then it’s dischargeable.
• Tax debts – There are a few rules for when tax debts are dischargeable in bankruptcy, but they aren’t consumer debts.

For the most part, these debts exist because they’re either involuntary or were incurred for profit, i.e. not for the debtor’s personal well-being. That might not make sense to you, given that people use credit cards to buy things that make them better off, and we would expect people who choose not to pay their taxes to be less responsible than someone who took on credit card debt and lost their jobs, but that’s the arbitrariness of the means test.

If you have consumer debt—or even only non-consumer debt—then it’s important to hire an experienced Las Vegas bankruptcy lawyer who knows how the difference can affect your chapter 7 bankruptcy.

For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Freedom Law Firm Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-803-9251 to set up your free consultation.