Misunderstanding the Chapter 7 means test rules for business debt

Orlando bankruptcy lawyer Jonathan Alper has written a nice piece reminding us that debtors — and sometimes lawyers, too, often don’t apply the means test rules on business debt correctly.

A quick primer: Debtors usually must pass a Chapter 7 “means-test” in order to qualify to file under that chapter and discharge debt outright without monthly payments to a trustee. Some high income debtors, won’ t pass the test, and have to file under another chapter, usually Chapter 13.

But wait! The key word is “usually.” Some debtors don’t have to file a means test at all. First among them are debtors who have “primarily business debt.”

Attorney Alper mentions a case where a high income debtor had three rental properties — all with mortgages — in addition to his own home, which is mortgaged as well.

He went to see an attorney, who erroneously told him that he couldn’t file because his household income of $385,000 was too high for the means test. The mistake that this lawyer made was counting the three mortgages on rental property as “consumer” debt.

In truth, the rental property loans counts as “business debt,” invoking the rule that debtors with primarily business debt qualify for a 7 without taking the means test. The key points here are that “primarily” can mean a bare majority of debt, and that your bankruptcy lawyer should be on his toes as to what types of debts count as business, and what is counted as personal.

 

By Doug Beaton

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