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The Business Debt Exemption to the Means Test for Chapter 7 Filers

With the promulgation in 2005 of the new bankruptcy law, commonly known as BAPCPA, a new beast came into existence. That beast is called the Means Test. The purpose of the Means Test is to limit eligibility for Chapter 7 bankruptcy. Congress believed that too many people with high incomes were attempting to escape their obligations to creditors. Consequently, it amended the Bankruptcy Code to require all bankruptcy filers with primarily consumer debt to pass the Means Test before filing for Chapter 7. The Means Test sets up an income barrier for individuals considering a Chapter 7 filing. That income barrier is predicated on state median income and is quite strict. Currently, individuals residing in Pennsylvania who make more than $44,172 per year are not eligible for Chapter 7 bankruptcy, with a few exceptions. The dollar amount of the barrier, or “safe harbor” as it is commonly referred to, increases as the number of family members increase, but not by much. Certain expenses can be deducted from income for purposes of the Means Test, but the safe harbor amount is a good rule of thumb.

If, however, your debt consists primarily of business debt and not consumer debt, then you will be exempt from passing the Means Test and will remain eligible for Chapter 7 bankruptcy. For example, let’s assume your annual income last year was $100,000. Assuming your debts are primarily business debts, you will still be eligible for a Chapter 7 filing.

So, what is business debt? Though the Bankruptcy Code does not define business debt, it does define consumer debt, which is debt incurred primarily for personal, family and household purposes. Business debt is essentially non-consumer debt. One example is credit card debt used for an individual’s business enterprise. Also, the majority of courts say that taxes, even personal income taxes, are not consumer debts.

The other important question to answer is what does “primarily” mean. Most courts agree that if the majority of debts – over 50% – consist of business debts, then an individual’s debts are primarily business debts.

This article gives a general overview of the topic. However, it is important to discuss this issue in detail with your attorney to minimize the possibility that a trustee will seek to challenge or dismiss your case for an improper filing.

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