Chapter 7 and When to File a Non-Consumer Bankruptcy

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A Chapter 7 can be filed by individuals, married couples, partnerships, and corporations. This type bankruptcy is normally used by individuals without many assets and who have little disposable monthly income, if any.

To qualify to file a Chapter 7, you normally have to be able to pass a Means Test devised by federal law, or you have to be at or below the median income for a family your size in the state in which you live and are filing. For the most part, the laws are plain about who qualifies to file a Chapter 7 and who does not, but there are exceptions to the rule.

If you are filing a non-consumer bankruptcy, you do not have to take the means test to qualify. To be considered a non-consumer bankruptcy filer, your non-consumer debt, ie. business related debts, must be greater than your individual or personal debts that have evolved through living expenses.

As an example, one debtor shared her and husband’s personal bankruptcy story on an internet bankruptcy site stating the bulk of their debt came from a personal business loan guarantee of $150,000 that was greater than their own personal debt. They rented their home, could hardly make ends meet even though living frugally, owed $13,000 in credit card debt they had been paying the minimum on for years, and had less than a $100 monthly disposable income by paying the minimum on their credit cards. And that, if there were no emergencies. She was worried she could not pass the Means Test and would have to file a Chapter 13.

Broader than just business debt, debtors who have primarily non-consumer debt are not subject to the Means Test under Title 11, U.S. Code 707 (b) under which the U.S. Trustee may dismiss or convert a Chapter 7 for abuse. The law specifically states that the provisions provided for under this code are for “primarily consumer debts.” The law further states by definition that a consumer debt is “a debt incurred by an individual primarily for personal, family, or household purpose.”

In effect then, if the debts are not primarily consumer debts, the Trustee cannot pursue the avenue of challenging the debtor as to the abuse provisions in the law. Therefore, debtors who have primarily business and/or non-consumer debt are not subject to the Means Test.

In the case of the illustration, the couple obviously has more non-consumer debt than personal debt. If any of the credit card debt was spent toward the business, it too would be counted as non-consumer debt.

Therefore, the couple would not have to take the Means Test to determine whether or not they qualify to file a Chapter 7. They automatically qualify to file due to the amount of non-consumer debt. The non-consumer debt in this instance, if unsecured, can be totally discharged in a Chapter 7. If the couple does not have many non-exempt assets, filing a Chapter 7 might be the type of bankruptcy they should pursue.

An experienced and qualified bankruptcy attorney would be in the best position to help the couple determine what they actually should do about filing bankruptcy.

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