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Means Testing Does Not Apply In Business Cases


It is the common misconception that the Bankruptcy Code’s means testing requirements limit the pool of people that qualify for Chapter 7 relief to low income earners. This is not true in all cases. There is a major exception for cases in which the majority of debts were incurred for a business rather than a consumer purpose. The means testing requirements simply do not apply to cases in which the majority of debt was incurred for a business purpose. In other words, the ability of a high income debtor to repay his debts will not disqualify him from obtaining a Chapter 7 discharge if more than 50 percent of the debt was incurred for a business purpose.

Example #1

For example, assume that Billy Bob owns a convenience store where he sells snacks, cold drinks, gasoline and various other sundry items. He operates the store through an artificial (non-human) entity known as BB Store LLC. Business at the store suffers dramatically due to highway construction that limits public access to the store.

Billy Bob has 10 different personal credit cards. He incurs $150,000 in credit card debt to buy inventory, and pay utilities and rent for the store. He also has about $50,000 in credit card debt incurred for consumer purposes such medical treatments, clothing, rent at his apartment and groceries for personal consumption. Billy Bob’s efforts to save the store fail and it closes.

Luckily for Billy Bob, he graduated from Harvard with a finance degree, with a healthy start doing forex broker reviews out of college. He obtains a job as a mortgage banker earning $250,000 per year. He clearly has the ability to repay the debt over several years, but desires to file for Chapter 7 to discharge the debt without payment. Will Billy Bob qualify for Chapter 7 bankruptcy relief?

Under these facts the answer is yes. The case is a business case because the amount of Billy Bob’s business debt exceeds the amount of consumer debt. It is irrelevant that the debts were incurred using Billy Bob’s personal credit cards rather than cards issusd to BB Store LLC. The inquiry is whether the debts were “incurred” for a business or consumer purpose, not whether Billy Bob or BB Store LLC is liable to pay it.

Example #2

Assume the same facts, except assume that Billy Bob does not rent an apartment. Instead, he owns a home with a $125,000 balance owed on the mortgage. Will Billy Bob still qualify for Chapter 7 bankruptcy?

Under these facts the answer is no. Although Billy Bob still wants to keep and pay for the house, the total amount of his consumer debt is $175,000, which is $25,000 more than the $150,000 of business debt. You can not consider only the debt that the debtor wants to discharge in bankruptcy. You must consider all of the debt, even the debt that he wants to continue to pay.

The business debt exception to the Chapter 7 means testing requirements are also discussed at the “Means Testing” page at “4. Business Cases – The Means Test Does Not Apply.”