Chapter 7 bankruptcy is often the best option for financially stressed individuals seeking debt relief. Most unsecured debts are fully discharged, absolving the debtor of any further obligation. The legal costs and fees are much lower than other forms of bankruptcy. Cases are usually completed in about six months, whereas other types of bankruptcy cases can take years. Chapter 7 usually requires the individual debtor to meet the means test, which screens out people whose income is too high in relation to their expenses. However, there is a waiver of the test available if the individual has primarily business debt, as opposed to consumer debt. 

Several years ago Congress created the means test in response to findings that many people were abusing the Chapter 7 bankruptcy remedy by having their debts discharged despite an ability to repay them. The means test is a complex mathematical analysis of a person’s financial position and family circumstances. It considers whether the debtor’s income is below the median income in the state where the petition is filed. If the income is below the median, the debtor can still meet the test by showing that a proportionally large amount of their income went to essential expenses like housing, food, clothing and medical bills.

However, the bankruptcy code waives the means test for individuals whose debts are primarily business debts. That means that more than 50 percent of their debt is not related to consumer activity, namely expenditures for household, family or personal purposes. In general, a business debt is one incurred for the purpose of making a profit, such as by running a commercial operation. Most income taxes are also considered business debt, even those on personal income, since tax obligations are not voluntarily incurred.

The distinction between business and consumer debts is not always clear-cut. For example, a person may take out a mortgage on a home in order to gain capital for use in a business enterprise. Or, the home itself might be considered a business if it is used as rental property. An individual’s personal credit card might be used in part to pay for business expenses. Also, the bankruptcy courts are not consistent in their characterization of student loan debts. Some jurisdictions treat them as business debts while others apply the profit-motive test, looking at what the money was used for.

A qualified bankruptcy attorney can advise you about whether the type of debt you hold qualifies you for the business-debt waiver of the means test and how to document your entitlement.

The Law Offices of James C. Zimmermann practices bankruptcy law from five locations across Sussex, Bergen and Passaic counties in New Jersey. For help with debt relief, call 973-764-1633 or contact us online for a free initial consultation.