Bankruptcy’s Means Test Doesn’t Apply to All

Cathy Moran, Esq. — Thu, 25 Mar 2010 13:47:14 +0000

New bankruptcy lawyers sometimes forget in the flurry over getting the means test right that it only applies when the debts are primarily consumer.

Primarily means over half in dollar amount.

The code defines consumer debts in §101(8) as debt incurred for a personal, family or household purpose.

You may be surprised by the kinds of debt that are not consumer debt:

Taxes
Business debts
Tort claims
Professional school loans

The last two are supported only by a few cases, but the thread of the decisions on the subject make the debtor’s election to incur the debt a deciding factor. One doesn’t “elect” to be subject to taxes, the courts reason, so they aren’t consumer debts. Likewise, auto accident liability.

Professional school loans perhaps come closer to being business debts rather than personal debts. The law isn’t clear, in my view.

Mortgage debt incurred to acquire a house is personal, but a refinancing to fund a business is probably business debt. Debt incurred to buy rental property is incurred with a profit motive, one of the courts’ favorite measures of whether a debt is or is not a consumer debt.

Then there is the business credit card. If actually used for business, it is not a consumer debt.

So, before you chug through the means test, make sure it applies to this client.

Find Solution That Works, Bankruptcy or No

Cathy Moran, Esq. — Sat, 23 Jan 2010 16:06:37 +0000

Good income, substantial priority tax debt, other debt within the limits: sounds like a Chapter 13 bankruptcy, doesn’t it? Yet the clients were in my office for a second opinion, convinced they couldn’t sustain over five years the payments their attorney provided in their Chapter 13 plan.

Their attorney’s approach reminded me of the Greek story of the brigand Procrustes, who waylaid travelers, offered them the “hospitality” of his home, then racked them (or lopped off limbs) to fit his bed. These people were going to fit in 13, in their attorney’s view, despite their protests it wouldn’t work.

They told me of medical expenses omitted from the budget, surgery planned for the near term, and fewer employment hours on the horizon. The payments, a stretch at this point, would be unsustainable.

My thought: do they need a discharge of the tax debt? is there an administrative remedy within the IRS that would protect them? Yes, said the enrolled agent I called up. With a scan of the couple’s facts, he felt confident that he could get their case tagged as currently uncollectable.

By opening up to non bankruptcy solutions, I think I got a solution that will work for the clients better than the rote selection of Chapter 13. Convert to 7, discharge what’s dischargeable, then approach the IRS.

There isn’t a non bankruptcy alternative for every situation, much as our clients wish, but we need to scan the horizon for alternatives before advising the client.

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Bankruptcy’s Means Test Doesn’t Apply to All

Find Solution That Works, Bankruptcy or No