The Business Debt Exception to the Means Test

The means test is the requirement under the 2005 Bankruptcy Code Amendments that individual debtors fill out to determine if they qualify for a Chapter 7 bankruptcy. Under this form of the bankruptcy petition, an individual debtor enters their income against their own and standard IRS deductions to project an average monthly income that determines if they qualify. Normally, most individual debtors must "pass" this means test in order to qualify for the Chapter 7 and thus a full discharge of their unsecured debt.

An exception to this requirement is found in 11 USC 707(b). This section deals with the dismissal of cases that are found to be an "abuse" of the requirements under the Bankruptcy Code, including and especially regarding a failure of the means test. Included in this language is the stipulation that the court may dismiss a case filed by an "individual debtor under this chapter whose debts are primarily consumer debts." Therefore, this implies then that an individual debtor will not be dismissed if the debt is primarily business in nature instead of consumer.

What this has generally been construed to mean in a practical sense is that a case with 51% or more in business debt is one that satisfies this "business debt exception" to the means test. Therefore, if a debtor has more than 51% of his debt as business in nature, the means test will not apply to that case. This can help situations where income in the means test would be problematic in terms of qualifying for a Chapter 7 bankruptcy. Of course, there must still not be a large disparity of income to expenses in other areas of the petition, but the exception can be valuable nonetheless. Of course, these are complex bankruptcy matters, so consulting an attorney is the best route to follow.

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