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  • Writer's picturePeter Bricks

Bankruptcy and Debt: How Business Debtors Can Avoid the Means Test

Updated: Feb 8, 2023

The means test for bankruptcy is used by the court to determine whether a debtor(s) has disposable income to pay creditors. Should the debtor(s) Chapter 7 means test reveal an excess of $182 in monthly disposable income, the debtor is presumed to be able to pay enough to its creditors through a Chapter 13 repayment plan rather than be eligible to discharge its debts through a Chapter 7.

However, the bankruptcy code has carved out an exception to this requirement in 11 USC 707. As 11 USC 707(b) only applies to debtors with primarily consumer debts, the business debtor(s) with majority non-consumer debts are not subject to the intricacies of the means test. In plain English this means that a debtor with majority non-consumer debt (over 50% of the amount of its debt) is eligible to file and receive a Chapter 7 discharge that a majority consumer debtor with the exact same amount of assets, debts, income, etc.. would otherwise not.

The debtor should be aware that it can still have its Chapter 7 case dismissed under 707(a), which some courts have ruled to include filing in bad faith. However, the primary point remains that debtors who incurred most of their debt through a failed business venture are eligible for a chapter 7 discharge even if their budget shows monthly disposable income that could go to their creditors.

What often confuses people about this provision is when debtors have a home mortgage under their name. A home mortgage by itself is not necessarily a consumer debt. The key is to determine how the debt was incurred. Whereas an investment property is not incurred as a consumer debt, a residential home mortgage is incurred for that purpose. This is often crucial, as a home mortgage is usually the debtors largest debt and might in and of itself exceed all the debtors non-consumer debts combined. For example, a debtor with $200,000 in business debt is not excepted from the means test if he/she has a $250,000 residential home mortgage, but that same debtor with no home mortgage or having incurred the mortgage debt as an investment property is eligible for the exception.

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