Business or Personal Debt? The Difference Matters
If you have debt, you may not think of whether the debt is personal—that is, incurred for your personal, family or household use—or whether the debt is business-related. After all, debt is debt and collectors are coming after you. But when it comes to Chapter 7 bankruptcy, the difference can mean being able to file for Chapter 7 or not.
The Means Test
To understand why, you need to understand the means test. The means test is a test to see if you can even file for Chapter 7 bankruptcy. If you make too much income, you would only be able to file for a Chapter 13—not Chapter 7.
For most debtors, the means test won’t prevent them from being able to file for bankruptcy. But for those who may make a moderate to moderate high income, the means test could prevent them from filing for Chapter 7.
Why Business Debt Helps
That’s where the difference between personal and business debt comes in. If your debts are primarily for business debts, you don’t have to take the means test. The means test doesn’t apply to you, and you can file for Chapter 7 bankruptcy regardless of your income.
As a general rule, if the debt was incurred with the purpose of making a profit, it is business debt—you don’t necessarily have to have owned a business. Many ordinary consumers may have business debts without realizing their debts are, in fact, business debt.
For example a mortgage that you pay on property that you rent out could be business debt. Debt that you pay towards a company car may be business debt. Credit cards that are used to pay for items, inventory, equipment or expenses for a business could be business debt.
Abuse of The Process
Bear in mind that just because you do not have to take the means test does not automatically entitle you to file for Chapter 7. The bankruptcy trustee could try to dismiss your case if they feel that you are living a lifestyle beyond your means, thus making the filing abusive.
For example, let’s assume you made $100,000 a year. If you have more business than personal debt, you do not have to take the means test, although if you did, you would likely not qualify for Chapter 7. But if the court also finds you have enormous expenses and a lavish lifestyle, and that you should be able to pay your debts given your income, your filing can be considered abusive, and the trustee can object to your discharge – even though there is no means test needed.
Still, even with this ability to object, for most reasonable debtors not living a lavish lifestyle, if more of your debts are business-related, you get to ignore the means test, a major hurdle to being able to file for Chapter 7.