Skipping the Means Test with Non-consumer Debt

The chapter 7 means test serves to limit eligibility to file chapter 7 bankruptcy, posing a problem for individuals with household income above the state median income and with expenses that don't fit well into the Congressionally-designed deduction system. While more people pass the means test than many would think at first, some people filing bankruptcy don't even have to take means test.

One important exclusion is the non-consumer debt exclusion. The Bankruptcy Code (in 11 USC 707(b)(1)) limits the applicability of the means test to "a case filed by an individual debtor under this chapter whose debts are primarily consumer debts." The code further defines consumer debt as "debt incurred by an individual primarily for a personal, family, or household purpose". Individuals with debt that doesn't fit the consumer debt definition therefore can skip the means test. So instead of going through the exercise of claiming expense deductions, the debtor simply files a one-page form (the awkwardly numbered "Official Form B 22A1 Supp").

Several observations can be made about the practical application of the “consumer debt” limitation. The most obvious application is where a debtor filing bankruptcy has predominately business debts, debts which were incurred with a profit motive. Such might include a loan involving commercial property, a guarantee on a business line of credit, or direct trade debt owed by a sole proprietor.

However, all non-consumer debt is not necessarily business debt. For example, tort liability could be characterized as non-consumer debt. Tort liability is a sort of non-contract liability for a wrongful act. For individuals, the most common source of tort liability is likely automobile accidents. Many tort claims arise out negligent acts, but others involve intentional wrongs or even strict non-fault liability. The overall concept is that the law imposed a duty which was not met leading to harm to a third party. Similarly, tax debts may be non-consumer debts as well, although the nuances of the particular tax may matter.

Student loans are an area that courts seem to differ in how to apply the definition of consumer debt. Ultimately, such characterization boils down to a factual inquiry. For example, one could draw distinction between a loan to pay professional school tuition and a loan to pay undergraduate living expenses.

How much non-consumer debt is enough?

The statute uses the word “primarily” when characterizing the extent of consumer debt required to mandate application of the means test. While a comparison of the total amount of the different sort of debts may well be instructive, it is not necessarily determinative. Courts can and do look at the bigger picture of the purpose and source of debts considered with an overall and not mathematically-driven view.

What about the Mortgage?

A residential mortgage is a consumer debt, and is often the largest single debt an individual owes. These facts combine to dramatically reduce the number of homeowners who can benefit from the non-consumer debt means test exclusion.