Chapter 7 Bankruptcy: Understanding the Classification of Debt and the Means Test

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Deciding when to file for bankruptcy is a stressful decision for anyone to make. But, even after deciding what type of bankruptcy to file, you have to determine if you qualify for the type you so desire. Most people opt for Chapter 7 bankruptcy because it discharges unsecured debt, unlike Chapter 13, which restructures your debt but requires the debtor to still make repayments.

The ‘means test’ is basically a financial calculation, which determines your eligibility to file for Chapter 7 bankruptcy. However, if your debts are primarily business debts, the means test will not apply, and you can file for Chapter 7 bankruptcy without worrying about it. It is not easy to classify your debts as consumer and non-consumer. But if you do classify most of your debts as business debts, the bankruptcy trustee appointed to your case and the court will review your debts carefully to ensure that you are not trying to beat the system.

Classification of Debt

Consumer debt is defined as debt that you incur for personal, family, or household purposes. Everything else is considered non-consumer debt. You must take the means test if your debt is primarily consumer-related.

It may seem simple to distinguish between consumer and non-consumer debts. However, this process is not as easy as it seems and is a source of contention and disputes during bankruptcy proceedings. The classification of your debt arises at the time it was incurred. As such, if you purchased something, like an iPad, for personal reasons and later use it to run your business, it will still be considered a consumer debt. Commonly, medical bills and taxes are treated as non-consumer bills, while student loans and car loans will be considered consumer debt.

The Means Test

The means test was developed to prevent individuals from abusing Chapter 7 bankruptcy proceedings to discharge debt they can afford to pay. Chapter 7 bankruptcies are meant to assist those who cannot pay their debts. The means test deducts specific monthly expenses from your “current monthly income,” which is a calculation of your income over the six months prior to you filing for bankruptcy. This calculation identifies your monthly disposable income. Unfortunately, the higher your disposable income, the less of a chance you will be able to file for Chapter 7 bankruptcy. If your disposable income is too high, the court will dismiss your petition or convert your bankruptcy to Chapter 13.

Contact a Bankruptcy Attorney for Help

If you are experiencing a tough time repaying your debts and are considering Chapter 7 bankruptcy, you should contact an experienced Memphis, TN bankruptcy lawyer who will assist you in classifying your debts and determining if you are eligible to have your debts discharged.

Thank you to our friends and contributors at Darrell Castle & Associates, PLLC for their insight into bankruptcy and chapter 7.