Chapter 7 bankruptcy , can provide a real solution to current or previous business owners who incurred significant business debt in building their business and continuing to operate their business. However, filing for Chapter 7 bankruptcy can pose a problem if you need to pass the means test.
Qualifying for Chapter 7 bankruptcy when you earn a high income can be a problem. Your high income can many times be an obstacle to qualifying for Chapter 7 bankruptcy and wiping out your debts. This can be overcome if the majority of your debts are business debts. If the debts you have incurred are primarily business debts then you will not need to pass the means test to file for Chapter 7 bankruptcy. The bankruptcy code requires that debtors whose income is over the median income for their household size pass the mean test. This test is not applicable if your debts are found to be primarily non-consumer debts. Debts that are considered consumer debts are defined as “incurred by an individual primarily for personal, family, or household purpose”.
Under the bankruptcy code if at least 51% of your debts are non-consumer debts then the means test does not apply. Non-consumer debts include debts incurred on:
- Credit cards for your business
- Loans for your business
- Leases of space or equipment for your business
- Invoices owed to vendors and suppliers
- Income Taxes
- Deficiencies owed on investment properties
- Mortgages owed on investment properties
- Judgments from Car Accident and Torts
When reviewing your debts to determine what category they fall under it is important that you analyze what the debt was initially incurred for. In addition you should be able to clearly separate business debts from personal expenses in your credit card use. Identifying the percentage of debt from your credit cards that belongs to business debts can become problematic when you have used the credit cards interchangeably between your business and personal expenses.
Not having the means test apply may have a significant advantage as it can allow someone who does not initially qualify to file for Chapter 7 bankruptcy. Although the means test does not apply there may be some potential issues that may arise if you show excess income after covering your necessary expenses. Always consult with a local bankruptcy attorney to determine if filing for Chapter 7 bankruptcy is an option for you.