Exception or Loophole to the

Chapter 7 Bankruptcy

Median Income/ Means Test Requirement

To qualify for a Chapter 7 Bankruptcy, you must pass the Means Test and Good Faith Test. The Means Test calculates your gross income from all sources in the six months prior to filing for Bankruptcy. The Means Test is meant to prevent Debtors from “abusing” the Bankruptcy system. If you are above median income and do not pass the Means Test, a presumption of abuse will arise (basically meaning you make too much money to file for Chapter 7 Bankruptcy). Unless you can overcome the presumption of abuse (for example, your financial situation has changed, such as a job loss), you will likely have to file or convert a case to Chapter 13 Bankruptcy.

 

Again, one requirement to qualify for Chapter 7 Bankruptcy is passing the Means Test. If you are above median income, you may not, under normal circumstances, qualify for Chapter 7 Bankruptcy.

 

There are some exceptions to this rule, however; one being if you have a “business debt" case. If you have more business debt than consumer debt, there is an exception or loophole to the median income rule; and you can be above median income and still be able to file for Chapter 7 Bankruptcy.

How do you know if you have a business debt case and what are consumer debts vs business (non-consumer) debts? The Bankruptcy Code defines a consumer debt as debt incurred by an individual for a personal, family, or household purpose. Many courts use a “profit motive” test. If a debt was incurred with the intent of making a profit, the debt should be classified as business debt. For example, a mortgage on your residence would be considered consumer debt; however, if you purchased a house for investment purposes and rented it out, then the mortgage would qualify as business debt. If you used credit cards for consumer purchases (food, clothing, household goods), those debts would be consumer debts; however, if you used the credit cards for business purposes (vendors, materials, supplies), then those debt would be business debts.

 

We take the time to carefully review your finances and your financial history during our initial consultation (which is free, by the way). If you have a business debt case, we will likely bring that to your attention during the consultation. If you might have a business debt case, we will help you identify what we think are your business debts. You will ultimately make a comparison chart/ list of your business versus consumer debts. We will review the list together and help you classify your debts accordingly. If your business debts are one penny more than your consumer debts, we will likely recommend that you file a business debt Bankruptcy case.

 

If we determine Bankruptcy is your best option, we will classify the debts accordingly in the Bankruptcy paperwork provided to the court. The United States Trustee (UST) (the government agency that oversees your case) will likely require you to provide documents to support/ prove that your debts are business debts. Again, we will help guide you through that process and prepare you accordingly.

 

As an aside, we have not discussed the Good Faith Test here. Again, to qualify for a Chapter 7 Bankruptcy, you must pass both the Means Test and Good Faith Test. Even if you are a business debt case, you must still pass the Good Faith Test to qualify for Chapter 7 Bankruptcy. You could do something on the eve of Bankruptcy which would make your filing one that is not done in good faith (for example, making an extravagant or lavish purchase). It would be best to meet with us as soon as you find yourself in some financial trouble to avoid this issue.

 

Your attorney will speak to you about all of the above in detail.