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‘Business Debts’ Might Keep Debtors in Chapter 7

Debtors considering chapter 7 New York bankruptcy often learn that if their incomes are above their state’s median family income, they must take the means test. The consequence of failing it would be converting their cases to chapter 13 (or, less commonly, chapter 11). This isn’t true for all debtors, notably business debtors, and some exceptions are built into the Bankruptcy Code for them. One worth discussing is the means test’s debt requirements.

Section 707(b)(1) of the Bankruptcy Code, which authorizes the means test, specifies that the bankruptcy court, the trustee, the U.S. trustee (who is different), or any “party in interest” (usually creditors), may move the bankruptcy court to dismiss a case that is filed by an individual debtor whose debts are “primarily consumer debts,” if the chapter 7 filing is found to be abusive. This means that the means test applies to non-corporate entities that owe non-consumer debts. “Consumer debts” are defined in Section 101(8) of the Bankruptcy Code as, “debts incurred by an individual primarily for a personal, family, or household purpose.”

For business debtors, it should be clear that if they can show their debts are “primarily” non-household debts, then they can argue that their above-median-income status should not exclude them from chapter 7. What it takes for a debtor’s debts to be “primarily” consumer debts isn’t clear from the statute, but it’s usually just a bare majority of their debt.

As for what “business debts” are, the Bankruptcy Code defines “small business debtor,” but that’s not really relevant to the distinction between “business debts” and “consumer debts” as defined. Rather, oftentimes bankruptcy courts will look at the “profit motive” behind the debts, so household credit card debt, mortgage debt, auto debt, and usually student loans are usually not considered “business debts” while individuals’ debts to purchase inventory for their businesses are.

It’s a good idea for debtors who are running unincorporated businesses to separate their businesses’ debts from their households’, for instance, by obtaining a new credit card for the business only, or ensuring that money from a home equity loan is exclusively used for the business and not family expenses. (For debtors who do incorporate: If their businesses fall on hard times, often the business will file in chapter 7, which won’t be subject to the means test since it’s not an individual, while the owner does as well, but his or her debts will probably be household debts anyway).

Bankruptcy courts might nevertheless dismiss business debtors’ cases for reasons grounded in Section 707(a) of the Bankruptcy Code. This section is often construed as a “good faith” requirement for filing, so business debtors might be stymied if the creditors or trustee can convince the bankruptcy court that the filing is in bad faith.

Business bankruptcies, especially when they’re unincorporated personal bankruptcies, are almost always more complex than the typical chapter 7 case. It’s crucial to have an experienced New York bankruptcy lawyer handle the matter.

For answers to more questions about business bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Chapter 7 Bankruptcy Lawyer Brooklyn NY Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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