By Kitty J. Lin
You may hear the phrase “consumer debt” a lot when you are looking into bankruptcy. The reason why it is so important that you know what is considered “consumer debt” is because it may determine whether you can qualify for a Chapter 7 discharge in bankruptcy. Pursuant to 11 U.S.C. §101(8) the term “consumer debt” means debt incurred by an individual primarily for a personal, family, or household purpose. Under 11 U.S.C. §707(b), a trustee (or any party in interest) may file a motion with the court to attempt to dismiss your Chapter 7 case if your debts are primarily consumer debts and the court finds that granting the discharge of your debt would be considered an abuse of the bankruptcy process. How does the bankruptcy court determine whether your debts are considered an abuse of the bankruptcy process? They look at the totality of circumstances, but the most important factor is whether you pass what is called the “means test.” The means test takes your income from all sources (except Social Security Act income) and averages it out for the past six months and compares that average income to other households living in your state. Some of your expenses may also be included in the means test, but most of the expenses are already specified for you based on your household size under the National Standards and Local Standards under the IRS Code.
What should you take away from this? You should note that if your debts are primarily non-consumer debts you are not required to complete the means test form. “Primarily” in this scenario means more than half. So if 51% of your debts are non-consumer debts you do not need to fill out the means test form. This makes it very important to discuss your debts with your bankruptcy lawyer to classify your debts correctly into consumer or non-consumer debts.
Non-consumer debt is really any debt that is not used for a personal, family, or household purpose. You make the determination of whether it is consumer debt or non-consumer debt based on your intention at the time the debt was incurred. One of the biggest categories of non-consumer debt is business debt. Business debt is any debt that was incurred for a business purpose, such as to start up, advertise, or maintain a business. Congress wanted to be sure that entrepreneurs are able to take risks in their businesses to hopefully benefit the economy. If the business does not succeed then the entrepreneur will be able to file for bankruptcy. Other types of non-consumer debt could be debt related to auto accidents (since the debt was not incurred for a personal, family, or household purpose) and personal income taxes.
Real estate debt could be both consumer and non-consumer debt. It is normally consumer debt since you are purchasing and incurring debt to purchase a house for your family to live in. Real estate debt may be non-consumer if the purpose at the time of incurring the debt was for investment (profit generating) purposes. A lot of realtors have created LLCs and were purchasing homes, fixing them up, and selling those homes for a profit. This would be considered a non-consumer debt.
Student loans could also be both consumer and non-consumer debt. This is a gray area in the law. It would depend on the purpose at the time the student loans were incurred. If it was for living expenses like room and board, that portion of the student loan debt could be considered consumer debt. The portion of the student loan that is used for things such as tuition could be considered non-consumer debt. It may be very hard to determine how much of the student loans were used for consumer purposes and how much of the student loan were used for non-consumer purposes.
Credit card debt may also be both consumer and non-consumer debt. If most of the debt was incurred for personal purposes like gas, food, utilities, entertainment, and similar endeavors then the credit card debt is considered to be consumer debt. If the credit card was used for business purposes like to advertise or maintain a business it would be considered non-consumer debt.
If you do not know whether your debt is primarily consumer or non-consumer debt or how to relay that in your bankruptcy petition it is advisable that you seek the services of an experienced bankruptcy attorney to review your case.