- Littlefield Law Firm
- Types of Bankruptcies
- Chapter 7 Bankruptcy
- Means Test
- Business Debt Exception
The Business Debt Exception to the Means Test
Many of the amendments to the bankruptcy rules enacted in 2005 were not intended to apply to business owners. In fact, the "means test" in Chapter 7 bankruptcy cases does not apply to most business owners when their consumer debts are less than the total amount of their business debts. In other words, when the debts are not "primarily consumer debts," the debtor can avoid the "means test" when filing a petition for a Chapter 7 bankruptcy.
Section 101(8) of the Bankruptcy Code defines "consumer debt" as "debt incurred by an individual primarily for a personal, family, or household purpose." The business debt exception to the means test acts recognizes that the means test only relates to individuals whose debts are principally consumer debts as opposed to business debts.
When the debtor can avoid the remaining means test process after declaring that the debts are primarily non-consumer or business debts. In other words, if the debtor’s balance is more than 50% non-consumer debts, the debtor is automatically eligible to file Chapter 7 bankruptcy.
Attorney for the Business Debt Exception in Dallas, TX
If you are a business owner considering filing for Chapter 7 bankruptcy, but you are concerned about the means test, then contact an experienced bankruptcy attorney in Dallas, TX, at Littlefield Law Firm.
We represent small business owners in bankruptcy court throughout the greater Dallas-Fort Worth area including in the Northern District of Texas at the Earle Cabell Federal Building in Dallas and the Eldon B. Mahon U.S. Courthouse in Fort Worth. We also represent clients in the US Bankruptcy Court for the Eastern District of Texas in Plano, TX.
At Littlefield Law Firm, our bankruptcy attorneys with offices in Dallas, TX, represent clients throughout Dallas County, Collin County, Kaufman County, and Rockwall County.
Call (972) 812-0900 today.
What Counts as Business Debts Under the Profit Motive Test?
The law recognizes that consumer debts are debts incurred by an individual mainly for domestic, family or personal purpose. Consumer debts are distinguished from non-consumer debts, under the profit motive test developed by the bankruptcy courts.
Under the profit motive test, the courts have found that if the debt was incurred to make profits, then the debt should be classified as a non-consumer debt or a business debt. Examples of business debts under the profit motive test would include a mortgage on a vacation home if the home was purchased as an investment and for rental income.
If the business owner used a personal credit card for business purposes, then the debt should be classified as a business debt. Likewise, if an individual guaranteed a debt for a business obligation, the personal guaranty would be deemed business debt. Any personal guarantees on investment losses would also be classified as a business debt. Even liabilities for a motor vehicle accident could be classified as a business debt under some circumstances.
Keep in mind that the business debt exception in a Chapter 7 bankruptcy case in Dallas, TX, is subject to good faith requirements and should not be used as a loophole to avoid the means test. The bankruptcy courts can disqualify a debtor not acting in good faith when declaring that debts are primarily non-consumer debts.
This article was last updated on Friday, February 16, 2018.