The means test applies strict rules for debtors filing bankruptcy in chapter 7—but not all debtors. Specifically, section 707(1)(b) of the Bankruptcy Code authorizes creditors, trustees, or parties in interest to move the bankruptcy court to dismiss cases filed by debtors whose debts are “primarily consumer debts.” What kind of debts is the statute referring to, and what does it mean for them to be “primarily” one type or the other? The answers are important because many debtors might be able to file in chapter 7 even if they might otherwise fail the means test.
To answer the second question first, the Bankruptcy Code does not define what “primarily” means in the context of consumer versus non-consumer debt, leaving the term’s meaning to the courts. Generally, they take it as half or more, but they sometimes look at the sources and purposes of debts to make their final determination. A minority of courts take a more literal view and look at whether the total number of debts are consumer versus non-consumer debts.
So that leaves us with the first question: What are consumer debt? Section 101(8), the Bankruptcy Code’s definitions statute, defines “consumer debt” as, “[D]ebt incurred by an individual primarily for a personal, family, or household purpose.” This sounds intelligible, but it’s still not specific. For example, credit-card debt can be for household purposes or business purposes.
I’ll list some examples of debts courts tend to recognize as “consumer debts.” First is mortgage debt for a homestead. These are probably the largest debts for debtors who have them. Auto loans for personal vehicles also fit in this category, as do credit-card debts used for household items, and student loans. Finally, domestic support obligations are always consumer debts. These examples usually comprise most chapter 7 debtors’ debts.
So far so good, but what are “non-consumer debts”? For sure secured loans on business properties, work vehicles, and credit cards used solely for business purposes. (Click here to read more about “business debts” that might keep debtors in chapter 7.) There are others that might be surprising, though. One is tax debts because these aren’t voluntarily incurred for household purposes. Another is medical debt for necessary procedures. The idea is that households don’t voluntarily borrow money for important health-care matters. The same goes for legal fees for business purposes, but not so for personal ones. Tort liabilities, like for car accidents, aren’t consumer debts. Interestingly, gambling debts are arguably non-consumer debts. Cases go both ways on that issue.
Finally, one interesting debt that debtors might be surprised to hear is arguably not be a consumer debt is a deficiency judgment on an unpaid mortgage or better still a deficiency for a mortgage after a short sale. Because the debts were not incurred to obtain something for personal or family use, debtors can argue that they’re non-consumer debts.
Because debtors can argue that so many of their debts are not consumer debts, it’s possible they will be exempted from the means test, even if they earn more money than the state’s median family income. If you owe money to creditors but have a fairly high household income, then talking to an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
